S3 E1: Crypto Isn’t Waiting for U.S. Policy with TuongVy Le

Katherine Wu

On this episode of Archebyte, we are joined by TuongVy Le to discuss crypto regulation. Vy is currently a Partner at Bain Capital Crypto, Head of Regulatory & Policy at BCC, and previously worked in the enforcement division at the SEC.

Vy starts off the conversation by giving listeners an overview of crypto regulation and policy as it stands today - an enforcement only approach with lack of guidance that leaves both founders and customers vulnerable. She explains how the events of the past year have led regulators to become hostile towards the crypto industry as a whole, without fully understanding the diverse range of use cases for blockchain technology.

We discuss the dangers of innovation outpacing regulation, and we acknowledge that if U.S. policy fails to keep up with the inevitable advancement in technology, the next Google or Apple of crypto could be founded overseas. This devastating prospect is a direct implication of regulators’ failure to provide guidance.

Katherine and Vy leave listeners with advice on how to navigate the current regulation landscape, and share what you can do to help the cause. After all, it’s not too late for the U.S. to be a world leader in crypto regulation and take advantage of all blockchain technology has to offer.

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⌛ TIMESTAMPS

0:00 Intro

1:38 Welcome Vy!

1:53 Vy’s background

5:07 The value of different perspectives

10:04 The state of crypto regulation today

17:50 Why is regulation so difficult?

20:18 Speed of innovation vs. speed of regulation

25:26 The unnecessary hostility of crypto regulation

26:57 Should U.S. based crypto founders relocate?

30:53 It’s not too late for the U.S.

31:19 The Coinbase Wells Notice

32:14 Lack of regulation

36:12 What you can do to help aid crypto regulation

41:12 Outro

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‍TuongVy Le: https://twitter.com/TuongvyLe12

Bain Capital: https://twitter.com/baincapcrypto

Katherine: https://twitter.com/katherineykwu

Archetype: https://twitter.com/archetypevc

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📜 TRANSCRIPT

Katherine

Hello everyone and welcome to the inaugural episode of Archebyte. I'm your host, Katherine Wu. As you have probably noticed by now, season three of what's formerly known as Cross-Chain Examination has rebranded. Not only do we have a new name, we have new logos, colors, and just in general a whole new vibe. The prefix “arch”, by the way, means “from the beginning”, and I really like the idea of having the prefix followed by byte (i.e. the basic unit of information in computer storage and processing.) I personally think it's a very fitting name for a crypto focused podcast, especially a builder focused one, and I hope you like it as well. 

Now the mission for the podcast remains the same. Each week at Archebyte, we have on the smartest voices in the crypto industry to tell us what's top of mind for them. And today's topic, I'm sure is top of mind for all of us.

I'm joined today by TuongVy Le - Vy for short, who is a partner and head of regulatory and policy at Bain Capital Crypto. Vy is the perfect guest for today to talk about the topic of crypto regulation and policy, given her background of crypto law firms and regulatory agencies. Welcome to the show Vy!

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TuongVy Le

Hi, Katherine. Thanks for having me.

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Katherine

So for listeners who may not know you yet, (although they definitely should) can you give us a quick tldr of your background and experience and how you ended up at the intersection of crypto and policy?

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TuongVy Le

Sure. So I'm a partner and the head of regulatory and policy at Bain Capital Crypto, which is a crypto dedicated venture capital fund. And there I work pretty closely with an infrastructure focused portfolio of early stage projects, mostly founders and developers based in the US, to help them kind of navigate the regulatory morass that we're in, in the US and in some cases abroad.

And then I also oversee regulatory diligence on pretty much every investment decision that our fund makes because we think it's a really important part of the process. Just given the environment that we're in. And then like in whatever free time I have left over, I do crypto policy and advocacy work. 

Before Bain, I was at Worldcoin, which was my first job in crypto.You may have heard of them. It's the project with the orbs, so I advised them on the launch of their token outside of the US, their wallet and there's the UK based identity protocol, just helping them devise a decentralization roadmap around all of that. 

And then my background before getting into crypto was in traditional financial regulation and enforcement, like advising public companies, financial institutions on everything from securities laws to AML compliance, which turns out is like a really useful background for being a lawyer in crypto.

And then of course, I spent almost six years at the SEC, first as an attorney in the enforcement division, which is actually how I first got interested in crypto. I started around the time that SEC created its crypto unit during the ICO boom, so I got the chance to work on some of the first crypto investigations that the agency did.

And at the time it was like 2017, so I had heard of Bitcoin, but outside of that I knew nothing about the blockchain. So in order to bring these cases through, you have to get up to speed on the technology and decide how these things are structured and how everything works. So, like this was 2017, as I said. So at the time it was just watching a bunch of really terrible videos on YouTube to learn about this stuff.

Fortunately, the quality of the content, the educational content has really improved, but that's how I got interested in it. I worked on these cases and later during my time there, I left the enforcement division to be chief counsel of the Legislative Affairs Office, which is the office that helps to oversee all the engagement with Congress, the White House, Treasury, other state and federal government entities and capital markets policy more generally.

But because I was in that role in 2021, it was actually a really interesting time for crypto because I don't know if you remember, but that was kind of the year that Congress started getting really interested in crypto and you started to see draft legislation to regulate the industry really increase. And there was just so much excitement and innovation happening and also just like a growing recognition I think within the government that crypto was here to stay and that we had to figure out what was the best way to deal with it.

And so I got to work on a lot of that proposed legislation, which is kind of like what convinced me to finally make the jump into crypto full time. So yeah, that's a little bit of background.

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Katherine

You literally have the perfect background for everything I want to talk about today. But I also especially like talking to people who I came from, you know, I would say the other side because it's really good to get perspective. Like, I don't know if you knew this. I went to law school. I actually spent a semester at the SEC, but this was before the crypto unit was formed. 

So a different perspective I think when you get to do different roles like one on the enforcement side and then you kind of go into industry and you realize that the gap between the two is larger than maybe you think. And if not for attorneys like you, for example, who spend the time on YouTube to watch these videos like, you know, that gap only will exist and then get bigger.

So I just love guests like you that can bring both perspectives.

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TuongVy Le

Yeah. And you know, it's not even just like going from, government regulator to the private sector. I feel like even making the jump from the enforcement division to the Legislative Affairs Office, I was still within the SEC. But like I think, you know, when you're in the enforcement division, it's very easy to feel like you're the center of the world.

And like the SEC is the enforcement division. But it's really not, the agency does and is supposed to do so much more than just enforcement. Right? It's supposed to engage in rulemaking and it does all the time. There are staff across the 20 something, other divisions and offices within the agency that do really important work that doesn't have anything to do with enforcement.

So I think it was actually really eye opening for me before I even went into the private sector and got an even broader view of the industry just to get out of enforcement and to see all of the other things that a regulator does and should be doing as we know in crypto. Right.

Like that's part of what we call for all the time.

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Katherine

So yeah, well, I'm glad you brought up lawmaking. I was going to talk about this at the end, but since you brought it up, it feels like there is a lot of confusion in not just the crypto industry, but I think maybe just like outside of the government or outside of DC on how laws have been made and especially in the last two years.

As you said, I feel like we've been seeing a lot of, you know, leaks, draft legislation, bills that sound really scary. And when they get leaked, you know, I think, you know, I've read them, I'm like, oh, my God, this could be terrible. And then you kind of just don't hear about it anymore. Whatever happens, I don't know.

But on the topic of rulemaking or lawmaking, do you think the draft legislations will go anywhere? Have they gone anywhere or what? Why or why not? Or even like how does that get made? 

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TuongVy Le

Yeah. So first of all, I'll just say, like, this probably makes me a huge weirdo, but administrative law was my favorite class in law school. Did you take it ?

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Katherine

No. no. no. Could you tell listeners what it is, because I mentioned it to my colleagues and they're like, what it is?

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TuongVy Le

Okay. So like administrative law is basically like, okay, so like, you know, growing up in school, you learn about the three branches of government, right? The executive branch like the president, the courts, obviously, and then the legislature. So like Congress, they pass laws. The president signs them or vetoes them. And then the courts are basically like a check on all of that.

But what I think most Americans don't realize is that Congress passes laws, but in order to actually implement them and enforce them, they rely on the pretty vast administrative state to actually do that. Right. So like in your day to day life as an American, like you're going to touch the administrative state and they're going to impact every aspect of your life pretty much, much more than like Congress will or other parts of government.

And so because of that, there are statutes and constitutional protections against what the administrative agency can do. And so I always just thought it was really interesting. And then now being in crypto is like being a kid in a candy store as a lawyer who loves administrative law and policy. Because you see all of these issues that you learned about in that class sort of playing out every day.

And then you understand like, Oh, that's why the Administrative Procedure Act is so important. That's why the major questions doctrine is so interesting. That's why you have non delegation or like Chevron deference. And when is Chevron deference? Deference like warranted and is it on the way out? Like, you know, all of these questions like we're thinking about them all the time because crypto really drives all of this.

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Katherine

All right. So you're bringing back, like, very faint memories of constitutional law when I was in law school. So I'm like, I kind of I like, kind of get it. I like, I'm like, yeah, no, this is like, you know, that's like behind, you know, but, but yeah, I guess like how does it relate to crypto specifically? So for example, like, am I right to fear that we're going to get some new framework or new laws passed?

Is that even realistic?

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TuongVy Le

Yeah. I mean, I don't know. As you know, last year was a very active year on the legislative front. Right. And you saw two major like really comprehensive crypto bills being introduced in the Senate, one out of the Senate Banking Committee, the other out of the Senate Agriculture Committee. You saw a plethora of other bills introduced in both the Senate and House that touched on like smaller parts of the crypto ecosystem.

And then of course FDX happened and I, I really think that did change the tenor of things. Unfortunately, you know, it was a tough year and I think it understandably caused DC to just become a lot more skeptical. And I think at this point I would just characterize it as outright hostile to the crypto industry. And so for that reason, I think it's just been a lot harder for legislation to get done.

But you know, I do think obviously Congress took some time to get set up. The committees are now formed and there's a new digital assets subcommittee. And, you know, Chair McHenry in the House has said that it's a priority for him. And I think Rep French Hill is like an excellent choice to lead that.

And so, you know, I think we're going to start seeing more activity. But, you know, like going back to sort of just the idea, you know, should it be legislation in Congress? This is not how we should regulate the industry. Should it be action at the administrative level? Like I actually think, you know, it makes sense to kind of step back and think about like, what's the right answer to that, right?

So I have a lot of thoughts on this because I'm an admin law nerd, but I think like one basic question that you should always ask, right, when there's like a genuinely new innovation that comes along, whether it's like, I don't know, back in the day, like the automobile or more recently like the internet and then now like the blockchain, like crypto revolution, right?

Like I think we need to step back and just ask ourselves, you know, if you have something new and truly different and innovative like that, like how should we approach it as a society? And then just as importantly, who should be deciding that question? Right. So if you look at regulators just kind of generally their jobs are like to protect us from harm and from risk, right?

To keep us safe, like the water we drink, the air we breathe, the food we eat, the cars we drive, the financial products and services we consume. So I've always thought that there's like some interesting incentives here, right? Like they're so focused on risk and harm and then obviously they get in a lot of trouble when they fail to prevent bad things from happening.

So you have to ask like, is that inherently in tension with fostering innovation? So, you know, if you're inclined to view everything new and different through such a risk averse lens, like everything is dangerous. Everything is scary. And then you couple that with the incentive to like, I think, interpret your authority as a regulator as expansively as possible, because why wouldn't you?

That's a problem, right? So you see that playing out right now with crypto, right? Like the SEC chair has said repeatedly that no new legislation is needed, the existing laws are sufficient. You just have to go fill out a form, come in and register, etc.. Oh, and by the way, we also have jurisdiction over the entire crypto ecosystem.

And it's true, right? The securities laws were designed to be flexible and to adapt to developments in the capital markets. And they have, for the most part, for like decades and decades now. And in fact, Congress gave the SEC additional exemptions, powers in the 1990s to give them like even more flexibility to be able to keep up with innovations or just like new things that were coming up in the capital markets.

But, you know, like in my view and I don't know if you agree, but I think a lot of people in crypto who are closer to the technology and you know, like we're both at funds. So like we're seeing new things that people are building all the time, right? I think in our view, much of crypto is just so fundamentally different that it doesn't even fall for the most part within the scope of the securities laws at all, like in my opinion.

Right. Like I think decentralized distributed systems probably were not something that Congress had in mind when they drafted the securities laws in the 1930 and forties. And the way that these things are regulated, if you're looking at it through a purely securities lens, for example, the way that these things are regulated has implications that go far beyond the mandate of any single regulator, including the SEC.

Right. So, you know, like an example of that is, say the SEC determines that a particular token that's native to a protocol or an application is a security. But it's sufficiently decentralized that it would be impossible to comply with, you know, the current registration and disclosure regime. Well, what does that mean? That effectively shuts the token down, right?

Because the token isn't just not just an asset that you can trade on Coinbase. Right. It potentially plays a lot of other roles, too. Like it might be the only way by which validators are paid for validating transactions and maintaining that protocol. It might be the only way that you can pay for goods or services on that protocol or on that application.

It might be like a way to participate in governance or get other benefits from being a part of that token holding community. Or it can be like a reward, right, if you're sticking to help secure the network from attack. So if that token gets shut down because the SEC decides that it's the security, it doesn't just mean that you can no longer trade on Coinbase.

I mean, it does mean that to or any exchange, but it also means that the entire protocol will cease to exist. Right. Plus any applications that live on top of it. So the classification of a token as a security and then the inability for that token to actually comply with the securities laws has implications for the entire ecosystem well beyond just that one determination and potentially like just, you know, it has implications for the future of the technology in this country.

Right. So, you know, like just imagine if it had been shut down in 2015, like the entire ecosystem and all of the innovation that it gave birth to would never have happened. So, you know, no single regulator is supposed to have that kind of power. And that's why I think it's always important to ask that question first. Right.

Like, who is it that should even be deciding, in our view, a question of such national importance? And I mean, to me, the answer is Congress, they're elected, they're accountable, they're better positioned to consider in a very comprehensive way the risks and benefits of this technology, how it impacts our economy, the financial system, our global competitiveness as a country, national security, like literally everything.

And Congress recognizes that. Right. To our point earlier, which is why you saw these comprehensive crypto bills introduced last year. And the White House, at least when it issued the executive order last March, also seemed to recognize. Right, that this was a big thing, big enough that it called for the entire government basically to coordinate and to figure out a comprehensive approach as opposed to like any single regulator trying to regulate the whole thing.

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Katherine

It's also, you know, right now, I think given the state of how crypto regulation is done, there's been a lot of criticism, rightly so, that it should not be done one off cases or by enforcement only, because that's not a good way to make law. You know, that doesn't really set any binding kind of precedent at all. Facts and circumstances, as we both know, are different in every case. Right. And I think now collectively, we understand Congress has to act and make laws. But why does that still feel so hard?

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TuongVy Le

Yeah, I mean, we have a divided Congress, of course. I mean, I think crypto has become a very non partisan issue. Right. I think you have people who recognize both the risks and like the opportunities that the technology and this new asset class presents on both sides of the aisle. But I do think, you know, because of a lot of the bad things that happened last year.

So obviously not just FTX, but the collapse of Tera and Three Arrows Capital and Celsius, all these bankruptcies and customers and investors being harmed that I think has really set those efforts back quite a bit. And I feel like Congress right now is just kind of trying to regroup and figure out what happened. And so it's going to take some time, I think.

But, you know, crypto policy folks have been working really hard. The trade associations have been working really hard. CCI and Blockchain Association, which were members of, are working tirelessly to help educate and sort of push back. It just feels like there's been kind of an all out assault on crypto in recent weeks and months. And so I don't know if anything is going to happen this year.

I know Stablecoin legislation, for instance, it was a priority last year and it looks like it's going to be a priority this year too. So I'm hopeful that that at least can get done. And then, you know, I don't know what they'll turn to next. But I think one way to make sure that we make progress for Congress is to, like, not bite off more than it can chew and sort of tackle like the low hanging fruit first potentially like I think Stablecoins, for instance, are a lot more straightforward than something like Defi, right?

So I think it's just a matter of what are the priorities, what are the obvious things that we can do in terms of customer protections and things like that, right? Like things that would have prevented like an FTX, I know, FTX was overseas or whatever. But like if, you know, crypto exchanges in the U.S., like what are the basic things that we can do around like protecting customer assets, making sure they're safe in the case of bankruptcy?

Right. So maybe implementing like a lot of the same protections that you have like in the broker dealer context or like in the bank context, when it comes to like insolvency events to make sure that customer assets still remain with the customer and that they're not just like, you know, going to get in line like any other predator.

So I think basic things like that should be straightforward and hopefully we can make some progress on things like that. But it's, it's just so hard to say.

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Katherine

I mean, the additionally really frustrating thing is, and you know, this, the industry has grown so much in just the last five, seven years. Yeah, there are now different sectors. There are now different types of assets. A couple of years ago, entities weren't around and now it's like a part of the crypto ecosystem. We have all kinds of business models from decentralized marketplaces or exchanges to centralized business models, and they run the gamut of all, you know, just all kinds.

There's no way to put one thing in a bucket, and it feels like things have grown very, very fast. And I think innovation will likely always outpace law making. But I think now it feels like tensions are kind of at an all time high and not just with one, like not just with the SEC, it's with everything. It's with things that come out of the White House, with speeches made by individual commissioners, Coinbase just got a Wells notice, it just feels urgent and tensions feel really high.

And I think about this all the time, which is, you know, how do we get here? Probably because we've outpaced the pace of rulemaking. But also when I think about it, it's like, was this always available? How bad do things need to get before we get real clarity? And is the future in the U.S.? You know, these are very top of mind frustrations.

I think among folks I talked to myself personally. It just feels really hard and it feels really frustrating.

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TuongVy Le

Yeah. So innovation is happening really quickly. Right? So actually that's one of the reasons it really annoys me when people are like “crypto has been around for over a decade and still hasn't shown why it's useful.” It's like, well, you know, bitcoin has been around for over a decade, but that's one very narrow use case.

It's basically just payments, right? All of the other stuff that exist in crypto now like what you mentioned like NFTs, defi, fiat back stablecoins, like all of that stuff has only been around for like a few years. And so I hate it when people are like, you guys have had forever to live to prove you're worth.

That's just not true. But yeah, innovation is happening really quickly. So I don't know that the pace of rulemaking hasn't been able to keep up for that reason. I think the issue is that there has been no rulemaking, right. Like the SEC, you know, like I was saying earlier, like we started looking at crypto cases when I was there in 2017, that was what, six years ago.

They did the tower reporting 2017 and then they issued the Corporation Finance, not even the commission, right. Corporation finance issues like that investment contract framework, which isn't even formal guidance, but they issued that in 2018. But outside of that, what have they actually done? Right. They haven't proposed a single rule with respect to any part of the crypto ecosystem, and that is a huge problem.

But as for tensions being high between the industry and DC, I think that's absolutely right. And it's because of all of the bad stuff that happened last year and I think it was so funny. Jerome Powell, the Fed chair, said recently that, you know, we want to allow for innovation, but the crypto industry, I think he literally said it's like “the crypto industry is a hot mess.”

And I was like, he's not entirely wrong. And, you know, it's unfortunate, right? Because as I mentioned earlier, I think there was a lot of just optimism and open mindedness when the president issued his executive order last March. But all these things happened and really set us back. But, you know, I would argue honestly that the reason that we got to that point where customers and users were left vulnerable is because Congress and the regulators have yet to create an environment in the US where legitimate crypto companies can operate with certainty and stability.

Right. An environment where companies acting in good faith have an actual path to compliance and where fraudsters can't take advantage of the regulatory uncertainty. Right. So this was not inevitable. And even just looking at the SEC, right, like Coinbase has been around since 2012 and the SEC approved them to go public a few years ago. Right. So the regulators have had a lot of time to think about what a path to compliance for something like a crypto exchange, for example, would look like.

So there's just a total lack of clarity around something like how the securities laws would apply to digital assets, and they're trading in a crypto exchange wanting to register with ASIC as an exchange or ETFs, which is a type of trading venue that's regulated by the SEC but is exempt from the requirement to register at the National Securities Exchange, for instance, like they'd be faced with like a lot of unsettled or unanswered questions if they actually wanted to register.

Right. And so the regulators, I think, have been really unhelpful in that regard, like an enforcement only approach is not you know, it has really limited value in terms of what other crypto projects or companies can learn from it and how they can come into compliance.

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Katherine

Yeah. And the additional drawback with an enforcement only way of regulating is that it fosters more hostility. Like in my mind, you know, every time I hear Chairman Gensler say something, I'm like, Ah, Gary's in his villain era. And it sounds really unfair. And it's, it's hard not to be emotional about it because, you know, you hear these speeches and it just feels like we're constantly being made to be the bad guys.

And sure, right. There are some loud people that have done some really bad things, but that detracts so much from the builders, from things that are actually going on from a good faith. Folks who are in the US trying to make it work, which further contributes to frustrations and further contributes to it. And you see a lot of angry sentiments online and that's not the most effective way to get things done.

But I think that's where people's emotions are now. And look, I'll give a shout out to the folks who are behind the scenes, who are not yelling online, who are making things work like CCI, you know, who are behind closed doors and actually engaging in actually talking and actually being educational and being, you know, informative, but it's hard to be so measured all the time when you're constantly feel like you're having to defend yourself.

And the other big question is, is this industry feasible in the U.S.? Do we all move? I mean, I'm sure a lot of builders you talk to are kind of always ready to move. Right. And I've never seen that in any industry where you actually think about picking up your home, moving to a different country just to make your job work, just to continue to do what you love. 

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TuongVy Le

Yeah. I don't know if you've been getting this question more and more lately from your portfolio. Right. But like I was saying earlier, our portfolio is mostly founders and engineers who are based in the US. And it's so heartbreaking because, you know, I've been working with them since last May when I started this job and for the first time like ever, they're starting to ask me, should we just like completely relocate everything?

That's not even just like leaving the U.S. to go somewhere that just, like, doesn't have regulations so that they can do whatever they want, right? It's not about that. It's like they want to go somewhere where there's actually, like, clarity and like a path for them to come into compliance, right? So the EU is going to pass mica and it's going to be implemented starting next year.

It's not perfect, but it's workable and it provides clarity. So I think a lot of companies would take that over what we have any day now, even though a lot of them would prefer to be in the US because we just have a talent pool across every field, every type of role that's kind of unmatched in the world, right?

So it really is just a shame that like it just makes me so sad that like our founders are starting to ask me that more for the first time. And the other really sad thing about it is, you know, speaking of Coinbase, right? Just thinking back over the last decade or even just the last five years where there was so much innovation happening like the U.S. has created so many like category defining companies in crypto.

Coinbase, Uniswap, OpenSea, right with entities like Circle. And when it comes to technological innovation, the first mover advantage is really, really important, right? And like a lot of people think that the Google or the Apple of crypto hasn't even been created yet. But if we continue down our current path and like the EU and the UK and like more and more countries in Asia continue down the path that they're going down, the Google of crypto and the apple of crypto and whatever, they're not going to be created in the US.

We're totally going to squander our first mover advantage. I mean, I think we are already and that's obviously a huge shame and it might not be something that we can easily come back from, right? Like we could be wrong. Crypto could disappear because it is useless in a year or just too dangerous or something. Right. Like crypto could go to zero in a year or two.

I mean, I don't think that's going to happen. I personally think it's inevitable and an incredible new technology. I don't think it's going to happen, but I don't know, that could happen. Right. Like maybe some of the people in Congress who are very anti crypto, maybe they're right, maybe crypto isn't going to amount to anything. But you have to ask yourself, "What if they're wrong, right?

Like at least if I'm wrong, the stakes aren't that high, right? It's like, okay, we tried it, I guess, like it didn't work out. But if they're wrong and crypto is completely offshore, think about how devastating that is. So like, it's much more dangerous to take that position where you're closing off the possibility and the opportunity entirely then to say, okay, we're going to implement regulations that will give us the kind of kinds of basic safeguard edge that we need to allow for, like the possibility that if this turns out to be like a really useful thing for the financial system, for the Internet, for the way that we interact with each other and coordinate as a society like we have to allow for that possibility. Right? We meaning like the government, which is just us, right? We live in a representative democracy. So like the government is the people that we elect. It's not the regulators, by the way, not direct this and.

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Katherine

Most importantly, like it's not too late. Sure, tensions are high. I think it's probably as high as it's been. There's probably a lot of hostility on both sides, but it's not too late. And I think about that all the time because people are now asking the question of whether or not I should go offshore or not yet going offshore.

And by the time you're waiting for all the builders to actually go offshore, then it's too late.

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TuongVy Le

Right? Exactly. So what do you think of Coinbase?

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Katherine

What I think.

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TuongVy Le

Yeah. They've said they're going to fight it. Right. Like if the SEC ends up charging.

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Katherine

But see, this is another example where Coinbase could fight it. Coinbase could also settle. If they do settle, that doesn't make new laws. That doesn’t really change anything. Even if you do go fight to court, unless you're taking it to the Supreme Court, that's not going to make binding law this endless litigation that either gets settled, it gets sorted out, but it doesn't actually do any I mean, maybe it will maybe this won't go to the Supreme Courts.

Maybe this is the first crypto case to go to the Supreme Court, in which case, great. But that is also going to be a multiyear process. We're not going to see that really play out until, I don't know, two or three years from now. And who knows what can happen in two or three years, right. Like all of this is just, you know, something happens.

And unless this is going to go again literally to SCOTUS, what does this really do for the industry? It's just going to force Congress to act maybe. But you know, like that will still take a little too long.

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TuongVy Le

Yeah. Yeah. I mean, one of the reasons besides the fact that, like the SEC has not engaged in any rulemaking with respect to crypto, like one of the reasons we have a lack of regulatory clarity is because the vast majority of the cases, like the 120 plus cases that they've brought have settled, right? So, you know, one way to get more clarity is through the courts.

It might take a while, like you said, but, you know, if you force the SEC to litigate, then the law is forced to develop, which I think is ultimately a good thing for the industry. And it sounds like you just based on what they said, that they are probably going to challenge this. And it's so funny. People keep asking me because I used to work there, like, is the SEC just bluffing as well as notice?

And to be fair, I was also really surprised that they went for it because I always considered an action against Coinbase to be like the nuclear option. But my answer to the question of whether the wells notice is a bluff is like, No, they're definitely not bluffing. The SEC doesn't bluff. Wells notices are really serious, right? They mean that the SEC has concluded its investigation and is ready to charge like it's ready to go to the commission for a vote for the most part.

And like when I was there most of the time when we sent out the wells notice, our complaint was basically already drafted and ready to go. Like that's how close to the finish line you are. And then, you know, if we received the Wells submission, of course we would review it and consider it and all of that. And sometimes we would take a Wells meeting with them.

But like in my experience it's pretty rare that it would persuade the staff to close the investigation altogether. You know, they might narrow the charges or maybe downgrade it from like a fraud to like a negligence charge or something like that. Like I've seen Wells notices cause that to happen. So there can be some benefit in engaging in that process.

But yeah, I don't know. I think it's kind of a strategic decision that they're going to have to make based on their appetite to litigate and and how much of their own like litigation strategy and, and arguments they want to save for that too.

‍

Katherine

But it's also it's like, you know what it is, it's so unfair because okay, like in addition to all the, you know enforcement actions that are happening and this that it feels to me more and more so that the cost of doing business in the US just to get ready to put aside a couple million dollars, basically the amount of stuff raised to go to settlement or to go to hire counsel.

When somebody knock on your door and serves you something that is absolutely prohibitive to any startups in the U.S. If you have to set aside seed round money just for lawyers to settle something that, by the way, it wasn't because you weren't educated was just because there was no clarity. That is insane.

That is literally insane.

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TuongVy Le

Yeah. I mean, Coinbase has been able to engage with us, see, you know, the enforcement action side, right? It's been engaged in talks with the SEC for a while now to try to come up with some sort of registration model that both sides were okay with. And I mean, just think about the time and money that's gone into that that could have been used to actually like product sales and resources.

Yeah, exactly. So it's just like the enforcement only approach is just so wasteful and it's so inefficient and ineffective, right? So among other things.

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Katherine

So. Well, I don’t want to end this on just like me ranting or like, you know, how can we say something positive? You know what? Yes. Another good question I get I actually think is a good direction is what can we do right? Like not only are people really taking it now seriously, but just nobody wants to be caught up in litigation.

Nobody wants to be part of a settlement process with a regulatory agency. And so a more, I guess, like constructive question, what can we as an industry do or what aren't we doing enough?

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TuongVy Le

Yeah. So I don't know how involved you are in advocacy and policy work. And just like meeting with members of Congress and their staff and regulators. But I think it's important to continue to do that. Right. You know, I do it a lot because I'm able to speak for like a pretty diverse cross-section of the industry represented by our portfolio.

Right. Like we are focused mainly on infrastructure investments, but it really spans the ecosystem, right? It's like protocols themselves, like actual new kinds of blockchains have a big investment in different privacy and scaling and like storage solutions. So just I think talking to Congress about the actual products and services and tools and things that people are building, doing demos for them, I think that's really helpful especially with a staff.

I find they find it really neat and cool and it's just like a lot of crypto is very hands on, right? Like you have to actually use these things to appreciate how cool they are. So I think continuing to do that kind of education is really important, engaging in that process. And then, you know, like Coinbase, right?

And like other companies and trade associations have made it pretty easy to figure out which candidates the public should be engaging with, which candidates they should be supporting, who are pro crypto, who are open to crypto. I think that's really important. And then just continuing to build products and engaging in best practices that are going to make those products and services safe for your users, I think that's also really important for us as an industry to focus on.

If we want Congress to support what we're doing. But yeah, I mean, it's so unpredictable how the legislation and everything is going to turn out, but I hope that we can start to like arrive at legislative frameworks that are sensible and workable to keep crypto in the U.S. because until that happens, the regulators are kind of free to do what they want, right?

Like sort of what I was saying earlier, they're going to interpret their authority the way that they want to. And it seems like they've been doing it in a pretty expansive way and then they can act, right. So it's not just the SEC. It's like the banking regulators, as we know. Right. Have been taking steps that have had the effect of isolating the crypto industry in ways that are really harmful.

And so that's the issue with the legislative congressional inaction is that the regulators are filling that void in ways they can get around. Yeah. Yeah, exactly. So. So it's urgent that Congress acts.

‍

Katherine

Yeah, I can't agree more. And I have my two cents on this too. Like, what can we do in the meantime while we're waiting for, you know, something to get fought out in courts or while we're waiting for Congress to figure it out? I think there's a couple of things. One, this is going to sound harsh, but stop throwing fits on Twitter, tagging people in Congress.

It just makes you look more unhinged, more.

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TuongVy Le

Like Twitter tantrums.

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Katherine

Just like no more Twitter tantrums, don't declare war on DC like that sounds so just like, we're not in a marvel movie like we're all adults in the room, like we can engage in constructive conversation. And so one of the questions I get a lot and just full disclosure, I'm an advisor to CCI, which is why I, like you, appreciate them and know all the hard work they do and think it's really important to have them in the ecosystem.

But I also know that as an industry we're really good at talking about technical things in the abstract, like grand theories. But I think what ultimately moves the needle is evidence based data. And this is why people in DC are doing, you know, people do polling data, people do case studies, people do user studies like whatever it is.

I don't think like when you search what is crypto good for, there's nothing like there's nothing and that's a number one question that gets asked because with lawmakers it's like, well, I won't care about this unless my constituents care about this. And why do my constituents care about this? Right. Like we need more real life examples. Yeah, we have crypto companies who can tell the story.

We can have folks who can tell the narrative, but there needs to be more evidence based. How is crypto changing the lives of your users? How is crypto changing the lives of your demographic? Those are really important stories to tell, like the human parts of it. I'm not hearing it enough, and if you want to make it work in the U.S., you've got to find us based studies.

So that's like my two cents. Yeah. Of what? I think we're missing what we can do that's actually constructive and helpful and could move the needle forward.

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TuongVy Le

Yeah, for sure. I agree with that 100%.

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Katherine

Okay. I think this is a good note to end on, my call to arms, like we want to stay and we want to build and you know, none of us want to uproot our homes.

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TuongVy Le

No. I love living here and love New York.

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Katherine

Yeah. So let's, you know, work to bring more constructive and progressive and engaging and educational content and conversations.

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TuongVy Le

Yes, agreed.

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Katherine

Awesome. Well, thank you so much for your time today.

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TuongVy Le

Thanks, Katherine.

‍

accelerating the decentralized future

S3 E1: Crypto Isn’t Waiting for U.S. Policy with TuongVy Le

April 12, 2023
 | 
41:56
 | 
S3:E1

On this episode of Archebyte, we are joined by TuongVy Le to discuss crypto regulation. Vy is currently a Partner at Bain Capital Crypto, Head of Regulatory & Policy at BCC, and previously worked in the enforcement division at the SEC.

Vy starts off the conversation by giving listeners an overview of crypto regulation and policy as it stands today - an enforcement only approach with lack of guidance that leaves both founders and customers vulnerable. She explains how the events of the past year have led regulators to become hostile towards the crypto industry as a whole, without fully understanding the diverse range of use cases for blockchain technology.

We discuss the dangers of innovation outpacing regulation, and we acknowledge that if U.S. policy fails to keep up with the inevitable advancement in technology, the next Google or Apple of crypto could be founded overseas. This devastating prospect is a direct implication of regulators’ failure to provide guidance.

Katherine and Vy leave listeners with advice on how to navigate the current regulation landscape, and share what you can do to help the cause. After all, it’s not too late for the U.S. to be a world leader in crypto regulation and take advantage of all blockchain technology has to offer.

📬 To keep up with the latest from Archebyte and receive articles and research from the rest of the Archetype team, subscribe to our newsletter: http://eepurl.com/iCApL2

- - - - - - - -

⌛ TIMESTAMPS

0:00 Intro

1:38 Welcome Vy!

1:53 Vy’s background

5:07 The value of different perspectives

10:04 The state of crypto regulation today

17:50 Why is regulation so difficult?

20:18 Speed of innovation vs. speed of regulation

25:26 The unnecessary hostility of crypto regulation

26:57 Should U.S. based crypto founders relocate?

30:53 It’s not too late for the U.S.

31:19 The Coinbase Wells Notice

32:14 Lack of regulation

36:12 What you can do to help aid crypto regulation

41:12 Outro

‍

‍👋 FOLLOW US

‍TuongVy Le: https://twitter.com/TuongvyLe12

Bain Capital: https://twitter.com/baincapcrypto

Katherine: https://twitter.com/katherineykwu

Archetype: https://twitter.com/archetypevc

‍

📜 TRANSCRIPT

Katherine

Hello everyone and welcome to the inaugural episode of Archebyte. I'm your host, Katherine Wu. As you have probably noticed by now, season three of what's formerly known as Cross-Chain Examination has rebranded. Not only do we have a new name, we have new logos, colors, and just in general a whole new vibe. The prefix “arch”, by the way, means “from the beginning”, and I really like the idea of having the prefix followed by byte (i.e. the basic unit of information in computer storage and processing.) I personally think it's a very fitting name for a crypto focused podcast, especially a builder focused one, and I hope you like it as well. 

Now the mission for the podcast remains the same. Each week at Archebyte, we have on the smartest voices in the crypto industry to tell us what's top of mind for them. And today's topic, I'm sure is top of mind for all of us.

I'm joined today by TuongVy Le - Vy for short, who is a partner and head of regulatory and policy at Bain Capital Crypto. Vy is the perfect guest for today to talk about the topic of crypto regulation and policy, given her background of crypto law firms and regulatory agencies. Welcome to the show Vy!

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TuongVy Le

Hi, Katherine. Thanks for having me.

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Katherine

So for listeners who may not know you yet, (although they definitely should) can you give us a quick tldr of your background and experience and how you ended up at the intersection of crypto and policy?

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TuongVy Le

Sure. So I'm a partner and the head of regulatory and policy at Bain Capital Crypto, which is a crypto dedicated venture capital fund. And there I work pretty closely with an infrastructure focused portfolio of early stage projects, mostly founders and developers based in the US, to help them kind of navigate the regulatory morass that we're in, in the US and in some cases abroad.

And then I also oversee regulatory diligence on pretty much every investment decision that our fund makes because we think it's a really important part of the process. Just given the environment that we're in. And then like in whatever free time I have left over, I do crypto policy and advocacy work. 

Before Bain, I was at Worldcoin, which was my first job in crypto.You may have heard of them. It's the project with the orbs, so I advised them on the launch of their token outside of the US, their wallet and there's the UK based identity protocol, just helping them devise a decentralization roadmap around all of that. 

And then my background before getting into crypto was in traditional financial regulation and enforcement, like advising public companies, financial institutions on everything from securities laws to AML compliance, which turns out is like a really useful background for being a lawyer in crypto.

And then of course, I spent almost six years at the SEC, first as an attorney in the enforcement division, which is actually how I first got interested in crypto. I started around the time that SEC created its crypto unit during the ICO boom, so I got the chance to work on some of the first crypto investigations that the agency did.

And at the time it was like 2017, so I had heard of Bitcoin, but outside of that I knew nothing about the blockchain. So in order to bring these cases through, you have to get up to speed on the technology and decide how these things are structured and how everything works. So, like this was 2017, as I said. So at the time it was just watching a bunch of really terrible videos on YouTube to learn about this stuff.

Fortunately, the quality of the content, the educational content has really improved, but that's how I got interested in it. I worked on these cases and later during my time there, I left the enforcement division to be chief counsel of the Legislative Affairs Office, which is the office that helps to oversee all the engagement with Congress, the White House, Treasury, other state and federal government entities and capital markets policy more generally.

But because I was in that role in 2021, it was actually a really interesting time for crypto because I don't know if you remember, but that was kind of the year that Congress started getting really interested in crypto and you started to see draft legislation to regulate the industry really increase. And there was just so much excitement and innovation happening and also just like a growing recognition I think within the government that crypto was here to stay and that we had to figure out what was the best way to deal with it.

And so I got to work on a lot of that proposed legislation, which is kind of like what convinced me to finally make the jump into crypto full time. So yeah, that's a little bit of background.

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Katherine

You literally have the perfect background for everything I want to talk about today. But I also especially like talking to people who I came from, you know, I would say the other side because it's really good to get perspective. Like, I don't know if you knew this. I went to law school. I actually spent a semester at the SEC, but this was before the crypto unit was formed. 

So a different perspective I think when you get to do different roles like one on the enforcement side and then you kind of go into industry and you realize that the gap between the two is larger than maybe you think. And if not for attorneys like you, for example, who spend the time on YouTube to watch these videos like, you know, that gap only will exist and then get bigger.

So I just love guests like you that can bring both perspectives.

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TuongVy Le

Yeah. And you know, it's not even just like going from, government regulator to the private sector. I feel like even making the jump from the enforcement division to the Legislative Affairs Office, I was still within the SEC. But like I think, you know, when you're in the enforcement division, it's very easy to feel like you're the center of the world.

And like the SEC is the enforcement division. But it's really not, the agency does and is supposed to do so much more than just enforcement. Right? It's supposed to engage in rulemaking and it does all the time. There are staff across the 20 something, other divisions and offices within the agency that do really important work that doesn't have anything to do with enforcement.

So I think it was actually really eye opening for me before I even went into the private sector and got an even broader view of the industry just to get out of enforcement and to see all of the other things that a regulator does and should be doing as we know in crypto. Right.

Like that's part of what we call for all the time.

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Katherine

So yeah, well, I'm glad you brought up lawmaking. I was going to talk about this at the end, but since you brought it up, it feels like there is a lot of confusion in not just the crypto industry, but I think maybe just like outside of the government or outside of DC on how laws have been made and especially in the last two years.

As you said, I feel like we've been seeing a lot of, you know, leaks, draft legislation, bills that sound really scary. And when they get leaked, you know, I think, you know, I've read them, I'm like, oh, my God, this could be terrible. And then you kind of just don't hear about it anymore. Whatever happens, I don't know.

But on the topic of rulemaking or lawmaking, do you think the draft legislations will go anywhere? Have they gone anywhere or what? Why or why not? Or even like how does that get made? 

‍

TuongVy Le

Yeah. So first of all, I'll just say, like, this probably makes me a huge weirdo, but administrative law was my favorite class in law school. Did you take it ?

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Katherine

No. no. no. Could you tell listeners what it is, because I mentioned it to my colleagues and they're like, what it is?

‍

TuongVy Le

Okay. So like administrative law is basically like, okay, so like, you know, growing up in school, you learn about the three branches of government, right? The executive branch like the president, the courts, obviously, and then the legislature. So like Congress, they pass laws. The president signs them or vetoes them. And then the courts are basically like a check on all of that.

But what I think most Americans don't realize is that Congress passes laws, but in order to actually implement them and enforce them, they rely on the pretty vast administrative state to actually do that. Right. So like in your day to day life as an American, like you're going to touch the administrative state and they're going to impact every aspect of your life pretty much, much more than like Congress will or other parts of government.

And so because of that, there are statutes and constitutional protections against what the administrative agency can do. And so I always just thought it was really interesting. And then now being in crypto is like being a kid in a candy store as a lawyer who loves administrative law and policy. Because you see all of these issues that you learned about in that class sort of playing out every day.

And then you understand like, Oh, that's why the Administrative Procedure Act is so important. That's why the major questions doctrine is so interesting. That's why you have non delegation or like Chevron deference. And when is Chevron deference? Deference like warranted and is it on the way out? Like, you know, all of these questions like we're thinking about them all the time because crypto really drives all of this.

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Katherine

All right. So you're bringing back, like, very faint memories of constitutional law when I was in law school. So I'm like, I kind of I like, kind of get it. I like, I'm like, yeah, no, this is like, you know, that's like behind, you know, but, but yeah, I guess like how does it relate to crypto specifically? So for example, like, am I right to fear that we're going to get some new framework or new laws passed?

Is that even realistic?

‍

TuongVy Le

Yeah. I mean, I don't know. As you know, last year was a very active year on the legislative front. Right. And you saw two major like really comprehensive crypto bills being introduced in the Senate, one out of the Senate Banking Committee, the other out of the Senate Agriculture Committee. You saw a plethora of other bills introduced in both the Senate and House that touched on like smaller parts of the crypto ecosystem.

And then of course FDX happened and I, I really think that did change the tenor of things. Unfortunately, you know, it was a tough year and I think it understandably caused DC to just become a lot more skeptical. And I think at this point I would just characterize it as outright hostile to the crypto industry. And so for that reason, I think it's just been a lot harder for legislation to get done.

But you know, I do think obviously Congress took some time to get set up. The committees are now formed and there's a new digital assets subcommittee. And, you know, Chair McHenry in the House has said that it's a priority for him. And I think Rep French Hill is like an excellent choice to lead that.

And so, you know, I think we're going to start seeing more activity. But, you know, like going back to sort of just the idea, you know, should it be legislation in Congress? This is not how we should regulate the industry. Should it be action at the administrative level? Like I actually think, you know, it makes sense to kind of step back and think about like, what's the right answer to that, right?

So I have a lot of thoughts on this because I'm an admin law nerd, but I think like one basic question that you should always ask, right, when there's like a genuinely new innovation that comes along, whether it's like, I don't know, back in the day, like the automobile or more recently like the internet and then now like the blockchain, like crypto revolution, right?

Like I think we need to step back and just ask ourselves, you know, if you have something new and truly different and innovative like that, like how should we approach it as a society? And then just as importantly, who should be deciding that question? Right. So if you look at regulators just kind of generally their jobs are like to protect us from harm and from risk, right?

To keep us safe, like the water we drink, the air we breathe, the food we eat, the cars we drive, the financial products and services we consume. So I've always thought that there's like some interesting incentives here, right? Like they're so focused on risk and harm and then obviously they get in a lot of trouble when they fail to prevent bad things from happening.

So you have to ask like, is that inherently in tension with fostering innovation? So, you know, if you're inclined to view everything new and different through such a risk averse lens, like everything is dangerous. Everything is scary. And then you couple that with the incentive to like, I think, interpret your authority as a regulator as expansively as possible, because why wouldn't you?

That's a problem, right? So you see that playing out right now with crypto, right? Like the SEC chair has said repeatedly that no new legislation is needed, the existing laws are sufficient. You just have to go fill out a form, come in and register, etc.. Oh, and by the way, we also have jurisdiction over the entire crypto ecosystem.

And it's true, right? The securities laws were designed to be flexible and to adapt to developments in the capital markets. And they have, for the most part, for like decades and decades now. And in fact, Congress gave the SEC additional exemptions, powers in the 1990s to give them like even more flexibility to be able to keep up with innovations or just like new things that were coming up in the capital markets.

But, you know, like in my view and I don't know if you agree, but I think a lot of people in crypto who are closer to the technology and you know, like we're both at funds. So like we're seeing new things that people are building all the time, right? I think in our view, much of crypto is just so fundamentally different that it doesn't even fall for the most part within the scope of the securities laws at all, like in my opinion.

Right. Like I think decentralized distributed systems probably were not something that Congress had in mind when they drafted the securities laws in the 1930 and forties. And the way that these things are regulated, if you're looking at it through a purely securities lens, for example, the way that these things are regulated has implications that go far beyond the mandate of any single regulator, including the SEC.

Right. So, you know, like an example of that is, say the SEC determines that a particular token that's native to a protocol or an application is a security. But it's sufficiently decentralized that it would be impossible to comply with, you know, the current registration and disclosure regime. Well, what does that mean? That effectively shuts the token down, right?

Because the token isn't just not just an asset that you can trade on Coinbase. Right. It potentially plays a lot of other roles, too. Like it might be the only way by which validators are paid for validating transactions and maintaining that protocol. It might be the only way that you can pay for goods or services on that protocol or on that application.

It might be like a way to participate in governance or get other benefits from being a part of that token holding community. Or it can be like a reward, right, if you're sticking to help secure the network from attack. So if that token gets shut down because the SEC decides that it's the security, it doesn't just mean that you can no longer trade on Coinbase.

I mean, it does mean that to or any exchange, but it also means that the entire protocol will cease to exist. Right. Plus any applications that live on top of it. So the classification of a token as a security and then the inability for that token to actually comply with the securities laws has implications for the entire ecosystem well beyond just that one determination and potentially like just, you know, it has implications for the future of the technology in this country.

Right. So, you know, like just imagine if it had been shut down in 2015, like the entire ecosystem and all of the innovation that it gave birth to would never have happened. So, you know, no single regulator is supposed to have that kind of power. And that's why I think it's always important to ask that question first. Right.

Like, who is it that should even be deciding, in our view, a question of such national importance? And I mean, to me, the answer is Congress, they're elected, they're accountable, they're better positioned to consider in a very comprehensive way the risks and benefits of this technology, how it impacts our economy, the financial system, our global competitiveness as a country, national security, like literally everything.

And Congress recognizes that. Right. To our point earlier, which is why you saw these comprehensive crypto bills introduced last year. And the White House, at least when it issued the executive order last March, also seemed to recognize. Right, that this was a big thing, big enough that it called for the entire government basically to coordinate and to figure out a comprehensive approach as opposed to like any single regulator trying to regulate the whole thing.

‍

Katherine

It's also, you know, right now, I think given the state of how crypto regulation is done, there's been a lot of criticism, rightly so, that it should not be done one off cases or by enforcement only, because that's not a good way to make law. You know, that doesn't really set any binding kind of precedent at all. Facts and circumstances, as we both know, are different in every case. Right. And I think now collectively, we understand Congress has to act and make laws. But why does that still feel so hard?

‍

TuongVy Le

Yeah, I mean, we have a divided Congress, of course. I mean, I think crypto has become a very non partisan issue. Right. I think you have people who recognize both the risks and like the opportunities that the technology and this new asset class presents on both sides of the aisle. But I do think, you know, because of a lot of the bad things that happened last year.

So obviously not just FTX, but the collapse of Tera and Three Arrows Capital and Celsius, all these bankruptcies and customers and investors being harmed that I think has really set those efforts back quite a bit. And I feel like Congress right now is just kind of trying to regroup and figure out what happened. And so it's going to take some time, I think.

But, you know, crypto policy folks have been working really hard. The trade associations have been working really hard. CCI and Blockchain Association, which were members of, are working tirelessly to help educate and sort of push back. It just feels like there's been kind of an all out assault on crypto in recent weeks and months. And so I don't know if anything is going to happen this year.

I know Stablecoin legislation, for instance, it was a priority last year and it looks like it's going to be a priority this year too. So I'm hopeful that that at least can get done. And then, you know, I don't know what they'll turn to next. But I think one way to make sure that we make progress for Congress is to, like, not bite off more than it can chew and sort of tackle like the low hanging fruit first potentially like I think Stablecoins, for instance, are a lot more straightforward than something like Defi, right?

So I think it's just a matter of what are the priorities, what are the obvious things that we can do in terms of customer protections and things like that, right? Like things that would have prevented like an FTX, I know, FTX was overseas or whatever. But like if, you know, crypto exchanges in the U.S., like what are the basic things that we can do around like protecting customer assets, making sure they're safe in the case of bankruptcy?

Right. So maybe implementing like a lot of the same protections that you have like in the broker dealer context or like in the bank context, when it comes to like insolvency events to make sure that customer assets still remain with the customer and that they're not just like, you know, going to get in line like any other predator.

So I think basic things like that should be straightforward and hopefully we can make some progress on things like that. But it's, it's just so hard to say.

‍

Katherine

I mean, the additionally really frustrating thing is, and you know, this, the industry has grown so much in just the last five, seven years. Yeah, there are now different sectors. There are now different types of assets. A couple of years ago, entities weren't around and now it's like a part of the crypto ecosystem. We have all kinds of business models from decentralized marketplaces or exchanges to centralized business models, and they run the gamut of all, you know, just all kinds.

There's no way to put one thing in a bucket, and it feels like things have grown very, very fast. And I think innovation will likely always outpace law making. But I think now it feels like tensions are kind of at an all time high and not just with one, like not just with the SEC, it's with everything. It's with things that come out of the White House, with speeches made by individual commissioners, Coinbase just got a Wells notice, it just feels urgent and tensions feel really high.

And I think about this all the time, which is, you know, how do we get here? Probably because we've outpaced the pace of rulemaking. But also when I think about it, it's like, was this always available? How bad do things need to get before we get real clarity? And is the future in the U.S.? You know, these are very top of mind frustrations.

I think among folks I talked to myself personally. It just feels really hard and it feels really frustrating.

‍

TuongVy Le

Yeah. So innovation is happening really quickly. Right? So actually that's one of the reasons it really annoys me when people are like “crypto has been around for over a decade and still hasn't shown why it's useful.” It's like, well, you know, bitcoin has been around for over a decade, but that's one very narrow use case.

It's basically just payments, right? All of the other stuff that exist in crypto now like what you mentioned like NFTs, defi, fiat back stablecoins, like all of that stuff has only been around for like a few years. And so I hate it when people are like, you guys have had forever to live to prove you're worth.

That's just not true. But yeah, innovation is happening really quickly. So I don't know that the pace of rulemaking hasn't been able to keep up for that reason. I think the issue is that there has been no rulemaking, right. Like the SEC, you know, like I was saying earlier, like we started looking at crypto cases when I was there in 2017, that was what, six years ago.

They did the tower reporting 2017 and then they issued the Corporation Finance, not even the commission, right. Corporation finance issues like that investment contract framework, which isn't even formal guidance, but they issued that in 2018. But outside of that, what have they actually done? Right. They haven't proposed a single rule with respect to any part of the crypto ecosystem, and that is a huge problem.

But as for tensions being high between the industry and DC, I think that's absolutely right. And it's because of all of the bad stuff that happened last year and I think it was so funny. Jerome Powell, the Fed chair, said recently that, you know, we want to allow for innovation, but the crypto industry, I think he literally said it's like “the crypto industry is a hot mess.”

And I was like, he's not entirely wrong. And, you know, it's unfortunate, right? Because as I mentioned earlier, I think there was a lot of just optimism and open mindedness when the president issued his executive order last March. But all these things happened and really set us back. But, you know, I would argue honestly that the reason that we got to that point where customers and users were left vulnerable is because Congress and the regulators have yet to create an environment in the US where legitimate crypto companies can operate with certainty and stability.

Right. An environment where companies acting in good faith have an actual path to compliance and where fraudsters can't take advantage of the regulatory uncertainty. Right. So this was not inevitable. And even just looking at the SEC, right, like Coinbase has been around since 2012 and the SEC approved them to go public a few years ago. Right. So the regulators have had a lot of time to think about what a path to compliance for something like a crypto exchange, for example, would look like.

So there's just a total lack of clarity around something like how the securities laws would apply to digital assets, and they're trading in a crypto exchange wanting to register with ASIC as an exchange or ETFs, which is a type of trading venue that's regulated by the SEC but is exempt from the requirement to register at the National Securities Exchange, for instance, like they'd be faced with like a lot of unsettled or unanswered questions if they actually wanted to register.

Right. And so the regulators, I think, have been really unhelpful in that regard, like an enforcement only approach is not you know, it has really limited value in terms of what other crypto projects or companies can learn from it and how they can come into compliance.

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Katherine

Yeah. And the additional drawback with an enforcement only way of regulating is that it fosters more hostility. Like in my mind, you know, every time I hear Chairman Gensler say something, I'm like, Ah, Gary's in his villain era. And it sounds really unfair. And it's, it's hard not to be emotional about it because, you know, you hear these speeches and it just feels like we're constantly being made to be the bad guys.

And sure, right. There are some loud people that have done some really bad things, but that detracts so much from the builders, from things that are actually going on from a good faith. Folks who are in the US trying to make it work, which further contributes to frustrations and further contributes to it. And you see a lot of angry sentiments online and that's not the most effective way to get things done.

But I think that's where people's emotions are now. And look, I'll give a shout out to the folks who are behind the scenes, who are not yelling online, who are making things work like CCI, you know, who are behind closed doors and actually engaging in actually talking and actually being educational and being, you know, informative, but it's hard to be so measured all the time when you're constantly feel like you're having to defend yourself.

And the other big question is, is this industry feasible in the U.S.? Do we all move? I mean, I'm sure a lot of builders you talk to are kind of always ready to move. Right. And I've never seen that in any industry where you actually think about picking up your home, moving to a different country just to make your job work, just to continue to do what you love. 

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TuongVy Le

Yeah. I don't know if you've been getting this question more and more lately from your portfolio. Right. But like I was saying earlier, our portfolio is mostly founders and engineers who are based in the US. And it's so heartbreaking because, you know, I've been working with them since last May when I started this job and for the first time like ever, they're starting to ask me, should we just like completely relocate everything?

That's not even just like leaving the U.S. to go somewhere that just, like, doesn't have regulations so that they can do whatever they want, right? It's not about that. It's like they want to go somewhere where there's actually, like, clarity and like a path for them to come into compliance, right? So the EU is going to pass mica and it's going to be implemented starting next year.

It's not perfect, but it's workable and it provides clarity. So I think a lot of companies would take that over what we have any day now, even though a lot of them would prefer to be in the US because we just have a talent pool across every field, every type of role that's kind of unmatched in the world, right?

So it really is just a shame that like it just makes me so sad that like our founders are starting to ask me that more for the first time. And the other really sad thing about it is, you know, speaking of Coinbase, right? Just thinking back over the last decade or even just the last five years where there was so much innovation happening like the U.S. has created so many like category defining companies in crypto.

Coinbase, Uniswap, OpenSea, right with entities like Circle. And when it comes to technological innovation, the first mover advantage is really, really important, right? And like a lot of people think that the Google or the Apple of crypto hasn't even been created yet. But if we continue down our current path and like the EU and the UK and like more and more countries in Asia continue down the path that they're going down, the Google of crypto and the apple of crypto and whatever, they're not going to be created in the US.

We're totally going to squander our first mover advantage. I mean, I think we are already and that's obviously a huge shame and it might not be something that we can easily come back from, right? Like we could be wrong. Crypto could disappear because it is useless in a year or just too dangerous or something. Right. Like crypto could go to zero in a year or two.

I mean, I don't think that's going to happen. I personally think it's inevitable and an incredible new technology. I don't think it's going to happen, but I don't know, that could happen. Right. Like maybe some of the people in Congress who are very anti crypto, maybe they're right, maybe crypto isn't going to amount to anything. But you have to ask yourself, "What if they're wrong, right?

Like at least if I'm wrong, the stakes aren't that high, right? It's like, okay, we tried it, I guess, like it didn't work out. But if they're wrong and crypto is completely offshore, think about how devastating that is. So like, it's much more dangerous to take that position where you're closing off the possibility and the opportunity entirely then to say, okay, we're going to implement regulations that will give us the kind of kinds of basic safeguard edge that we need to allow for, like the possibility that if this turns out to be like a really useful thing for the financial system, for the Internet, for the way that we interact with each other and coordinate as a society like we have to allow for that possibility. Right? We meaning like the government, which is just us, right? We live in a representative democracy. So like the government is the people that we elect. It's not the regulators, by the way, not direct this and.

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Katherine

Most importantly, like it's not too late. Sure, tensions are high. I think it's probably as high as it's been. There's probably a lot of hostility on both sides, but it's not too late. And I think about that all the time because people are now asking the question of whether or not I should go offshore or not yet going offshore.

And by the time you're waiting for all the builders to actually go offshore, then it's too late.

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TuongVy Le

Right? Exactly. So what do you think of Coinbase?

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Katherine

What I think.

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TuongVy Le

Yeah. They've said they're going to fight it. Right. Like if the SEC ends up charging.

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Katherine

But see, this is another example where Coinbase could fight it. Coinbase could also settle. If they do settle, that doesn't make new laws. That doesn’t really change anything. Even if you do go fight to court, unless you're taking it to the Supreme Court, that's not going to make binding law this endless litigation that either gets settled, it gets sorted out, but it doesn't actually do any I mean, maybe it will maybe this won't go to the Supreme Courts.

Maybe this is the first crypto case to go to the Supreme Court, in which case, great. But that is also going to be a multiyear process. We're not going to see that really play out until, I don't know, two or three years from now. And who knows what can happen in two or three years, right. Like all of this is just, you know, something happens.

And unless this is going to go again literally to SCOTUS, what does this really do for the industry? It's just going to force Congress to act maybe. But you know, like that will still take a little too long.

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TuongVy Le

Yeah. Yeah. I mean, one of the reasons besides the fact that, like the SEC has not engaged in any rulemaking with respect to crypto, like one of the reasons we have a lack of regulatory clarity is because the vast majority of the cases, like the 120 plus cases that they've brought have settled, right? So, you know, one way to get more clarity is through the courts.

It might take a while, like you said, but, you know, if you force the SEC to litigate, then the law is forced to develop, which I think is ultimately a good thing for the industry. And it sounds like you just based on what they said, that they are probably going to challenge this. And it's so funny. People keep asking me because I used to work there, like, is the SEC just bluffing as well as notice?

And to be fair, I was also really surprised that they went for it because I always considered an action against Coinbase to be like the nuclear option. But my answer to the question of whether the wells notice is a bluff is like, No, they're definitely not bluffing. The SEC doesn't bluff. Wells notices are really serious, right? They mean that the SEC has concluded its investigation and is ready to charge like it's ready to go to the commission for a vote for the most part.

And like when I was there most of the time when we sent out the wells notice, our complaint was basically already drafted and ready to go. Like that's how close to the finish line you are. And then, you know, if we received the Wells submission, of course we would review it and consider it and all of that. And sometimes we would take a Wells meeting with them.

But like in my experience it's pretty rare that it would persuade the staff to close the investigation altogether. You know, they might narrow the charges or maybe downgrade it from like a fraud to like a negligence charge or something like that. Like I've seen Wells notices cause that to happen. So there can be some benefit in engaging in that process.

But yeah, I don't know. I think it's kind of a strategic decision that they're going to have to make based on their appetite to litigate and and how much of their own like litigation strategy and, and arguments they want to save for that too.

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Katherine

But it's also it's like, you know what it is, it's so unfair because okay, like in addition to all the, you know enforcement actions that are happening and this that it feels to me more and more so that the cost of doing business in the US just to get ready to put aside a couple million dollars, basically the amount of stuff raised to go to settlement or to go to hire counsel.

When somebody knock on your door and serves you something that is absolutely prohibitive to any startups in the U.S. If you have to set aside seed round money just for lawyers to settle something that, by the way, it wasn't because you weren't educated was just because there was no clarity. That is insane.

That is literally insane.

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TuongVy Le

Yeah. I mean, Coinbase has been able to engage with us, see, you know, the enforcement action side, right? It's been engaged in talks with the SEC for a while now to try to come up with some sort of registration model that both sides were okay with. And I mean, just think about the time and money that's gone into that that could have been used to actually like product sales and resources.

Yeah, exactly. So it's just like the enforcement only approach is just so wasteful and it's so inefficient and ineffective, right? So among other things.

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Katherine

So. Well, I don’t want to end this on just like me ranting or like, you know, how can we say something positive? You know what? Yes. Another good question I get I actually think is a good direction is what can we do right? Like not only are people really taking it now seriously, but just nobody wants to be caught up in litigation.

Nobody wants to be part of a settlement process with a regulatory agency. And so a more, I guess, like constructive question, what can we as an industry do or what aren't we doing enough?

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TuongVy Le

Yeah. So I don't know how involved you are in advocacy and policy work. And just like meeting with members of Congress and their staff and regulators. But I think it's important to continue to do that. Right. You know, I do it a lot because I'm able to speak for like a pretty diverse cross-section of the industry represented by our portfolio.

Right. Like we are focused mainly on infrastructure investments, but it really spans the ecosystem, right? It's like protocols themselves, like actual new kinds of blockchains have a big investment in different privacy and scaling and like storage solutions. So just I think talking to Congress about the actual products and services and tools and things that people are building, doing demos for them, I think that's really helpful especially with a staff.

I find they find it really neat and cool and it's just like a lot of crypto is very hands on, right? Like you have to actually use these things to appreciate how cool they are. So I think continuing to do that kind of education is really important, engaging in that process. And then, you know, like Coinbase, right?

And like other companies and trade associations have made it pretty easy to figure out which candidates the public should be engaging with, which candidates they should be supporting, who are pro crypto, who are open to crypto. I think that's really important. And then just continuing to build products and engaging in best practices that are going to make those products and services safe for your users, I think that's also really important for us as an industry to focus on.

If we want Congress to support what we're doing. But yeah, I mean, it's so unpredictable how the legislation and everything is going to turn out, but I hope that we can start to like arrive at legislative frameworks that are sensible and workable to keep crypto in the U.S. because until that happens, the regulators are kind of free to do what they want, right?

Like sort of what I was saying earlier, they're going to interpret their authority the way that they want to. And it seems like they've been doing it in a pretty expansive way and then they can act, right. So it's not just the SEC. It's like the banking regulators, as we know. Right. Have been taking steps that have had the effect of isolating the crypto industry in ways that are really harmful.

And so that's the issue with the legislative congressional inaction is that the regulators are filling that void in ways they can get around. Yeah. Yeah, exactly. So. So it's urgent that Congress acts.

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Katherine

Yeah, I can't agree more. And I have my two cents on this too. Like, what can we do in the meantime while we're waiting for, you know, something to get fought out in courts or while we're waiting for Congress to figure it out? I think there's a couple of things. One, this is going to sound harsh, but stop throwing fits on Twitter, tagging people in Congress.

It just makes you look more unhinged, more.

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TuongVy Le

Like Twitter tantrums.

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Katherine

Just like no more Twitter tantrums, don't declare war on DC like that sounds so just like, we're not in a marvel movie like we're all adults in the room, like we can engage in constructive conversation. And so one of the questions I get a lot and just full disclosure, I'm an advisor to CCI, which is why I, like you, appreciate them and know all the hard work they do and think it's really important to have them in the ecosystem.

But I also know that as an industry we're really good at talking about technical things in the abstract, like grand theories. But I think what ultimately moves the needle is evidence based data. And this is why people in DC are doing, you know, people do polling data, people do case studies, people do user studies like whatever it is.

I don't think like when you search what is crypto good for, there's nothing like there's nothing and that's a number one question that gets asked because with lawmakers it's like, well, I won't care about this unless my constituents care about this. And why do my constituents care about this? Right. Like we need more real life examples. Yeah, we have crypto companies who can tell the story.

We can have folks who can tell the narrative, but there needs to be more evidence based. How is crypto changing the lives of your users? How is crypto changing the lives of your demographic? Those are really important stories to tell, like the human parts of it. I'm not hearing it enough, and if you want to make it work in the U.S., you've got to find us based studies.

So that's like my two cents. Yeah. Of what? I think we're missing what we can do that's actually constructive and helpful and could move the needle forward.

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TuongVy Le

Yeah, for sure. I agree with that 100%.

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Katherine

Okay. I think this is a good note to end on, my call to arms, like we want to stay and we want to build and you know, none of us want to uproot our homes.

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TuongVy Le

No. I love living here and love New York.

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Katherine

Yeah. So let's, you know, work to bring more constructive and progressive and engaging and educational content and conversations.

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TuongVy Le

Yes, agreed.

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Katherine

Awesome. Well, thank you so much for your time today.

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TuongVy Le

Thanks, Katherine.

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