Kalshi Caught Between the CFTC and a Michigan Court

[00:00:00]designing an AIHBC company. When I was at Riot a few years ago, we were building a data center in Corsa, Texas.

[00:00:06]Everything was going swimmingly. It seemed like the community was on board until they weren't. Out of nowhere, there was a lot of Facebook opposition to the data center that was being built.

[00:00:14]And we traced exactly where this opposition was coming from. As it turned out, it was coming from an environmental activist who didn't even live in the city. She came from the city next door.

[00:00:23]And we looked into what she was doing and her background. and we realized that she had actually partnered with Greenpeace which at the time Greenpeace had received a huge infusion of cash from a rival cryptocurrency to Bitcoin that the explicit purpose of this Greenpeace movement was to flood or cast fear, uncertainty and doubt on Bitcoin itself. And so from that experience, that's when I realized we need to follow the money. Um, and in doing so, I was able to translate that follow the money ethos to this national project we're doing right now. What continues to bother me is that it's very easy to feed into this natural fear of technology that many people have this natural fear of change. And you see across crypto, across AI, like the people who should be supporting this technology the most are fighting it. And who am I talking about?

[00:01:05]I'm talking about the progressives. Like crypto on its face is the most democratizing approach to finance you could have. It gives people real-time access. And yes, there need to be client protections, but it it's it's a very progressive technology. AI is absolutely leveling the playing field overnight when it comes to information and education. Um it's a huge huge opportunity for people who have not had access uh who haven't had like you know that the opportunity for on the job training because they didn't know somebody. So this is very progressive technology and so it's it's just crazy like when you see some of those progressive technologies coming on with this incredible progress you know the some of the progressives saying no no no we don't like this because it's dangerous. I I think we've got that backwards. Poly market odds were at 75% in May and now they're around a little under 40% and they've come down kind of linearly which just you know speak to this every day that it's not done is a day is a day wasted. the ethics question. It's hard for me to not think of that as a delicious political nugget that some uh people want to kind of wrap up and take home with them to to eat another day to point to the president's, you know, personal um interests in in digital assets. And of course, the disclosure a couple of weeks ago, he's made well clear of a billion dollars between himself and his family is red meat for the Democrats. Um it's important that it gets done. I do think at this point the reason that it would be a good support for the market is it would be a surprise. I do think the market would take it as a surprise that passage takes place. It's not going to be a yep, thought so. No big deal. We expected this. I don't think it's priced in right now. And so surprise is one of the most powerful, I guess, emotions that can that can help fuel either up or down moves in prices. So, uh, passage would be a surprise and I think it would be hard to imagine a market that doesn't experience some some lift. Well, you know, I think for us what's exciting to begin with is the uh traction and the early activities that we're seeing on the chain. I think it's great to see developer building. You see user engaging and you see the chain performing very well like what we were designing. So, not only it's super fast but also the gas are also pretty low and so so far we are seeing a ton of uh excitement from the customer about just that and the fact that the chain is really working like we we attended. Um we just launched super recently. So it's only two weeks ago that we announced uh some of these changes and we are seeing the TVL actually increasing quite a bit.

[00:03:20]It's it's past 370 million. A lot of that is stable coin because we are connecting directly the Robin Hood app uh to the chain for our earn product where you can get approximately 7% on your stable coin. And I think that was kind of the the main EO moment that we are trying to push on when we announce all these new products in in London. And my hope is also that at some point we can reduce the amount of jurisdiction limitation. I think in the US for example we're waiting on this uh clarity act that we've been discussing. The SEC has also been vocal that they do believe that tokenization of securities will be helpful for the markets. I think in a lot of region in across the world they could actually benefit from tokenization because right now it's very hard to interact with some of these exchanges and so liquidity is therefore limited.

[00:04:07]But in a world where you can access all these exchanges and all these assets across um all the countries, you can actually largely increase the liquidity and therefore largely increase the economic economical benefits for for the local region. So I you know I think right now we are kind of at the beginning of the tokenization world and I wouldn't be surprised in if in a few year uh everything is tokenized and you can access any exchange 24/7 uh because the benefits kind of outgrew the the old regulations that are in place.

[00:04:37]>> So the president now has greater leverage over commissioners who are already serving. So if you have a commissioner who, you know, the president thinks is blocking the administration's agenda, the president now has significantly more ability to replace that commissioner with someone who is more aligned with his administration's priorities. So what that means is agency policy, right? So everything from rulemaking and enforcement priorities to granting exemptive relief that can all become much more closely aligned with the White House and these things could potentially change a lot more quickly from one administration to the next. So I think what you'll see happen is that presidential elections will now have like a much more immediate effect on crypto regulation and just like regulation in general, right? So instead of waiting years for agency leadership to gradually turn over when commissioner's terms expired, a new administration could come in, replace, you know, all the commissioners presumably and start like reshaping uh regulatory policy from like very early on. So I think like that that could potentially have like a really big impact on on policy. What changed is the distance between having the information and being able to act on it because like the more you understand agents and loops, the better you can get at making it work for you. And this was not just like one fighter here and there using a chatbot. They have decided to devote significant resources to build an industrial operation where they have specialist AI units. Some of them who just sit in vehicles near the front trying to figure out how to make the next move. So they are doing AI governance in a way that like a lot of startups should be doing, but in a horrible like the worst possible way.

[00:06:15]And they're learning how to do all this through jihadist networks. So like terrorists can talk to each other and share information and they were trained by other terrorists, right? So you may have heard that LLMs have these safeguards, right? Like if you ask about a weapon, it will say, "No, I can't answer that." Those are super easy to get around.

[00:06:34]>> There's a concept in like complex systems like a normal accident, right?

[00:06:37]Um you have all of these like fail safes and and mitigations, but you know, you're running a nuclear reactor at 3M Island, right? And one day there's like a mouse or something and the guy's like, "Ah, I'm just going to prop the door open, right?" And they prop the door open and then the air conditioning fails in that room because it can't switch on.

[00:06:58]There's like something that the temperature goes and then it's like this cascading thing where like all of the fail and you know if you have a complex system that's running for long enough, right, and people are involved, entropy just gets you, right? And I'm sure that this like price upkeep border thing was like probably not set up the way that it is now. And someone's like, I'll just put this as like an interim solution and we'll replace it and it's only going to be a temporary thing. I'm just going to prop the door open overnight just to let like like make sure that the mouse doesn't get in or whatever the hell the problem is or like there's birds in there.

[00:07:30]>> Uh long story short, market tanked and we started a winter. Uh it's not great.

[00:07:34]So we postponed the ICO and we did it now recently and in the end that 5% of value is no longer worth 11 12 million.

[00:07:41]We were able to raise around $4 million.

[00:07:43]So $4 million was our new budget. Now we have a new budget much less than the original and we debated a lot what to do. Do we give tokens? Definitely not in the in the plans cuz then we go to zero and then what's the point of doing this at all? Right? You need to take care of your stakeholders. And so we decided to stick to our 5% budget and uh we debated it with our investors with our you know users and we decided that instead of giving some people maybe one or 2% reward whereas some people were losing 90 100% on the whites we said let's just make everybody whole so at least nobody lost any money and so the people that really were losing were the YT guys and we we made them whole and then everybody else they didn't make any money but they didn't lose any money. If you hold crypto on your phone, your biggest vulnerability isn't your wallet, it's your carrier. AT&T, Verizon, and T-Mobile have been breached again and again, and SIM swaps are still one of the easiest ways for attackers to drain accounts. That's where Cape comes in.

[00:08:43]America's privacy first mobile carrier.

[00:08:46]Same premium service, but Cape rotates the identifier on your SIM every 24 hours, deletes your call and text metadata after a day, and protects against SIM swaps with a 24word recovery phrase that only you control. You also get two middle toend encrypted secondary numbers for banking and signups, so you stop handing your real number to every app that asks. Go to cape.co/chained co/chained and use code unchained for 33% off your first 6 months. Heads up everyone, we've now fully transitioned Bits [music] and Bips to its new dedicated channels. So if you're not yet subscribed to the new Bits and Bips channels on X, YouTube, [music] Spotify, Apple Podcast, or wherever you get your podcast, go there and subscribe now. For the next few weeks, we'll play segments of the full interviews on Unchained as a reminder.

[00:09:56]Hi all and welcome to Decks in the City, where the wallets are cold and the takes are hot. Before we get going, remember we're lawyers, but we're not your lawyers. Nothing you hear on decks in the city is legal or financial advice and it doesn't create an attorney client relationship for the fine print. As always, check on janecrypto.com.

[00:10:13]We'll be back in a minute after [music] a word from our generous sponsors.

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[00:10:23]Same premium service you'd expect from any other carrier, but designed so your number, your location, and your data actually stay yours. Get 33% off 6 months at cape.co/unchained and we're back. So, first we have Jesse, web3 prosecutor turned web3 protector at Rivet Capital and V from the SEC to web 3. And I'm your host KK Catherine, fluent in Tradfi and conversant in deep tech. So today we have not talked about prediction markets in a minute which is crazy because frankly there's so much news happening about prediction markets every second of every day that we've specifically tried to avoid talking about them every week because some of this starts to feel legally and functionally repetitive even though it's hitting the headlines. Well, we've gotten to the point now where today it is unavoidable to talk about some of the prediction markets and in particular Koshi has had a rough week, you guys.

[00:11:31]>> Um, there's a bunch to unpack here, but I'll I'll dig in with probably the most important piece of this. So, I'll refresh everyone. Basically, prediction markets are suing states. States are suing prediction markets. The CFTC is suing states. It's a mess. Okay.

[00:11:50]>> The love triangle.

[00:11:52]>> It is a It is a dysfunctional love triangle. Uh all over a slew of nerdy legal interpretation that we'll unpack a little bit. But back in March, the state of Michigan sued Koshi, saying that Khi's sport events contracts are actually betting. So Khi needs a Michigan gaming license. And this goes back to something we've covered on the show before, but basically it's an interpretation of whether gaming and these sports event contracts in particular listed on federally CFTC registered designated contract markets which are exchanges for derivatives are actually gaming or gambling or not.

[00:12:33]Okay, so this is the crux of the issue.

[00:12:36]Federal jurisdiction, CFDC jurisdiction versus state jurisdiction. Well, Michigan sued Koshi. This litigation is proceeding. I think anyone who is a lawyer will understand that litigation takes months at a minimum, if not years.

[00:12:51]But post their actual lawsuit, they successfully sought and got something called a temporary restraining order or a TTRO. And that happens a lot in litigation where it's like the plaintiff says, "Hey, you're doing something bad.

[00:13:06]you're doing something damaging. But while the lawsuit is proceeding to figure out if you're doing the bad thing or not, I'm asserting that you're doing this bad thing. So, I'm going to seek a TTRO to stop you from doing the alleged bad or violative conduct.

[00:13:22]>> Let me just jump in there and say it does happen sort of a lot, but it's actually a super high burden. Correct.

[00:13:30]Because the person who's asking for it has to show like a high likelihood. I don't want to get into the legal ease of it. a high likelihood of success. And so the judge has to think it is worth it enough to put a stop to this based on allegations alone because it seems like they're going to be successful. So it is a high burden.

[00:13:49]>> Absolutely. Which is why you don't see it all that often. Now other states have also similarly sought TR TRRO's against prediction markets. And what has happened for the most part is these prediction markets have just moved to geoblock the state says, "Okay, we're no longer going to deal with Michigan people while this litigation is proceeding." But what is somewhat unusual is not only did the judge grant the TTRO sought by Michigan, but the court also ordered Kelshi to liquidate the Michigan pending sports event contracts. the other orders, the other TTRO's have basically just said Kali poly market prediction market just stopped offering these markets and then allowed people to liquidate on their own. So Cali said, "Okay, we got a state order. We have to follow the states. Uh we're going to go ahead and geoence Michigan." And then they moved to cancel the pending sports trades in Michigan by Michigan indivi by individuals in Michigan. So they fully complied with the judge's order and it was apparently a pretty small volume of trades. So, fairly easy to do that. Here's where it gets fun. The CFTC then went to Koshi and said, "Wait, do not cancel the trades." And they actually did this by invoking emergency powers that they have that haven't been used since 1980.

[00:15:11]I think before any of us were even born, when those emergency powers were last used in Jimmy Carter's grain embargo against the Soviet Union during the Cold War. I really needed to refresh myself on that. So, what does this mean? This is by far the most aggressive position the CFTC has taken to assert power in these markets. And it's also a really good example of the CFTC's argument for preeemption. And the CFTC all along, echoed by the other prediction markets, has said federal law needs to preempt states when regulating these exchanges and these contracts to avoid preventing to avoid placing the platforms in an impossible situation because now Khi was faced with a situation where it's like we adhere to a judge's order and you know basically violate an order from our federal regulator or vice versa. It's they're an impossible situation. They're in between a rock and a hard place. So, it's it's very difficult. I thought that this was like super bonkers and also like because I thought it was relevant, I looked into the history of it a little bit and the fact that this like break glass emergency power has only been used about four times in the history of the CFTC and they were for when like markets were actually on fire. whether it be like a potato contract historic default like a coffee price spike some like attempt to corner the silver market and then what you were talking about the grain embargo with President Carter. So, it's worth having a conversation here about why the CFTC did this, how it relates to the prior four times it's being used, what this means for them using it in the future, and how are they choosing winners and losers about like which markets they quote unquote care about and want to focus on. Not to mention like that it did put Kelsey in a tough position as you mentioned, but I think like the historical context here cannot be ignored.

[00:17:17]>> Absolutely. And when we talk about emergency powers, what we're talking about specifically is the Commodity Exchange Act gives the CFTC broad emergency authority. And this this authority was created after a bunch of market manipulation like bad episodes in the 70s. and it allows the CFTC when an emergency exists to take extraordinary action to protect the integrity of derivatives markets. However, historically this emergency authority had only been used to intervene against market participants, not against a state. So this is also a pretty significant expansion of that emergency authority period. Does the law define what constitutes an emergency?

[00:18:02]>> Like like many situations in the law, no, not exactly.

[00:18:09]>> Um, so there's there's like I think the CFTC has the right to invoke the power.

[00:18:15]It's just unusual because historically the power was used because the markets themselves were malfunctioning. Like I believe the intention for these emergency powers were like manipulation or defaults or clearing house stress.

[00:18:30]That that was not this right. Like there was no emergency because a bunch of people in Michigan were trading sports events contracts. But I think one of the justifications for the commission's use of this power is the issue that we just talked about where Khi is in an impossible position and we need to assert federal preeemption to prevent others from being put in this position.

[00:18:54]Um and the other really important point to note about this is Touch can keep fighting this lawsuit, right? Like just because they adhere to the TTRO, they can keep fighting it. the the case is not moot because even though they're not offering sport sports events contracts to Michigan, they are prevented from offering sport event contracts. And it's a big question mark like a procedural question is whether the CFTC's intervention actually makes the dispute stronger because it took a fight between Khi and Michigan and turned it into basically a case over federalism, right?

[00:19:29]the scope of of uh power under the commodity exchange act. It took a business dispute between a company and a state and turn it into a kind of a massive uh you know federalism fight and significantly raises the stakes and >> makes the case a much stronger case for appellet review. So this >> I think everyone assumes that it'll reach the Supreme Court uh eventually, but this like this really marks a major escalation >> of the CFTC's involvement in this area and I think it's just going to make the Supreme Court even more like eager to take this matter up. But I yeah, this is this is different than anything we've seen happen lately. It's interesting because at the same time there's all these comments coming in to the CFTC about their potential prediction market regulatory structure which I think we've touched on before in prior but there's like an open comment period right now and I don't know if you guys saw but it was either today or yesterday former CFTC chair Tim Msad who's very respected in and out of crypto um but you know has strong opinions one way or another said something like the CFDC has lost its way or something like that when it comes to regulating prediction markets. So, this is interesting in that like people that really understand the space are pushing back as well and those that worked at the federal agency and so understand the importance of having power at that agency are pushing back. And this is all in light of what you guys are saying with like the continued court cases like I'm sure you guys saw, but Koshi lost their preliminary injunction bid in New York just last week, too. So, we've talked about many of the states.

[00:21:18]Obviously, New York is a big state for them. And so really trying to understand like, okay, maybe they I actually don't know how big of a market Michigan is, but maybe they can geoblock certain states, but they're not going to want to geoblock Nevada. I'm sure they're not going to want to geoblock New York. So yeah, really focusing their attention on the kinds of states that matter for them is also important. I also think like just you know like we we're sort of handling these legal issues like state by state right now but I think it's really important to take a step back and just realize how enormous the implications are for sports gambling if the CFTC and like Kelshi like ultimately prevail in this legal fight, right? Like if they win and you're a sports betting platform, why wouldn't you just try like fit every sports bet into the legal form of an event contract so you can be federally regulated as a DCM and no longer have to worry about not just state by state like all the stuff that you have to deal with state by state, right? Like the g the gambling licenses and the taxes and the product restrictions and just like a hodgepodge of different consumer protection rules.

[00:22:31]Why would anyone opt for that if they could just be subject to one federal regime that covers them for the whole country? I think people don't appreciate what the implications are like if the CFTC and Kelsey win, it's going to completely transform sports like the sports gambling.

[00:22:47]>> And I think that's the whole crux of the issue from the state perspective is that that is inappropriate and the states want and need that jurisdiction from the state perspective. However, on the other side of the fence, there is the argument that this kind of activity is better on designated contract markets because they operate as many self-regulatory organizations. You know, they police, they enforce, and they have federal jurisdictions. So, the federal argument is look, like these contracts are better suited and more appropriate and more regulated than, you know, being at the in the purview of state gaming commissions. And it's super interesting you say that KK like as a reframing because remember all of this on the state level is largely about sports right and obviously sports is a huge part of Kouchy and Poly Markets like networking and contracts but there's a lot more that I know we're going to talk about in a bit later. There's so many more types of contracts and like the concept of splitting your sports betting/events contract from a different type of event contract particularly as it grows into a more of a hedging vehicle for compute etc. will I mean that could be a real problem too. So it could be an argument that is taken to the Supreme Court and that they may understand.

[00:24:08]>> This will definitely go to the Supreme Court. I mean, the Supreme Court is just getting chalk full of future CFTC fights, right and left. I mean, but look, shifting gears a tiny bit, I said at the beginning, Cali's had a rough week because in addition to this, they also canled plans to offer contracts linked to airportwide canceled flights for what I would actually call policy oriented reasons more than anything else. So, this is a dramatically different scenario than kind of the sports events contracts. We're not really talking about sports events contract in the context of manipulation.

[00:24:43]Now, of course, there's issues with potential manipulation with sports events contracts, but for the most part or, you know, people throwing games, etc., etc., but for the most part, it's more about the federalism issues, state versus federal. Other contracts, they're more manipulation centric or that is the concern. And that's what happened with these contracts. Effectively, Khi said, "Hey, like this makes sense." And I actually agree with them from a hedging perspective. They said these flight cancellation contracts can serve as really important hedging for hedging instruments for conference organizers and people whose business are highly dependent and sensitive to flight cancellations. So this is an important way to hedge. I can actually see a multitude of >> Oh my god is already so bad. I like I >> want to insert people potentially putting blockers on our flights in order to be able to make money to me. Like that moral hazard conversation is like do not make me have more delays at the airport.

[00:25:50]>> Jesse hit you. You're hitting the nail on the head. Okay. Like I promise I was going to get there, but then again, who hates travel insurance? Like me. Me.

[00:26:00]It's, you know, rife with red tape. But it's hard.

[00:26:03]>> Who has gotten travel insurance before on this channel?

[00:26:06]>> I have literally never >> pay for that.

[00:26:09]>> Fair.

[00:26:10]>> We do not pay for that.

[00:26:12]>> I have never paid for it. Sometimes my companies have paid for it. But the reason I haven't paid for it is because if you actually take the moment to read the fine print with travel insurance, it's ridiculous. Okay. So, here's a different way for people to hedge their their travel in a way. and and I can see why flight cancellations really have material negative economic impact on a slew of businesses. So, okay, we have the economic use case for it, but everybody came out and was basically like this is a terrible idea because these contracts are going to exist and there's going to be all these bad day bad guys that are, you know, driven economically to create a whole host of scary issues at airports to prompt cancellations.

[00:26:54]Even though Koshi did have lots of rules to designed to prevent insiders from profiting, but of course that's that's not airtight. And then FlightAware also came out and said, "Cali, you can't use our data for these contracts," which actually doesn't even make sense to me because the information on this is all in the public domain. So no more flight contracts basically for >> there might be rules about API or scraping. I'm not sure where that would have come from, but I do think it's super interesting that the beginning of this is like how she's having a bad week because of the state versus federal argument. And then they're also getting sort of stopped by vendors and by data.

[00:27:35]So, it's it's really interesting to try and think through being a lawyer there or an operator there and navigating all these different parties and access to information and like what can you actually do?

[00:27:48]>> Yep. Yep. I mean, >> like public backlash to some of these event contracts that pop up, right? Like they I mean, you can tell that they respond to that.

[00:27:57]>> Yeah.

[00:27:58]>> Being a GC of those prediction, it's not an easy job. Okay. We keep inviting some of those GCs on this FOD because we know them and they don't have time to come on podcast. [laughter] >> I just assume none of them are sleeping like they haven't seen their families because it's kind of busy these days with the litigation docket. But no, for real, the last thing I'll mention with Khi is this is notable. It's just buried in all the other notable news is they've also been embroiled in some insider scrutiny surrounding Donald Trump's longtime teleprompter.

[00:28:31]And you know, think about it. A teleprompter gets the text from the president's speech writing or comm's team before it's public. Okay? So the allegation is that this teleprompter was placing bats on Khi. Palshi picked up the irregular activity fulfilling its DCM self-p policing obligation and now this individual is on leave. But it raises again kind of insider related restrictions and how do we prevent this sort of thing in a slew of different scenarios going forward on all prediction markets. I mean to be clear this is not a issue that's unique to Cali.

[00:29:11]>> Yeah. I mean that one's like a no-brainer.

[00:29:14]I and I'm really happy that Kelshi was able to discover it and crack down. But to what V has said many times on this podcast before like for everyone caught like how many are doing this from anonymous accounts and like understanding or like different accounts or ones that aren't tied clearly to their profession like how many of these insider trades are happening that aren't being caught and what's our plan moving forward particularly as it expands um into different types of markets. The ones that super bother me obviously relate to national security um which this is at least adjacent to but who knows what else is happening out there.

[00:29:57]So good on Koshi for finding this and hopefully there's more and more tools to do so.

[00:30:02]>> Yeah. On that note, we're gonna give Koshi a break and go to break to hear more from our sponsors. And when we come back, we're gonna hear about APAC, which is not an area of the world that we talk about all that much, but we're Nobody should sleep on APAC. There's a lot going on. So stay tuned. You'll hear more. If you hold crypto on your phone, your biggest vulnerability isn't your wallet, it's your carrier. AT&T, Verizon, and T-Mobile have been breached again and again, and SIM swaps are still one of the easiest ways for attackers to drain accounts. That's where Cape comes in. America's privacy first mobile carrier. Same premium service, but Cape rotates the identifier on your SIM every 24 hours, deletes your call and text metadata after a day, and protects against SIM swaps with a 24word recovery phrase that only you control. You also get two middle to end encrypted secondary numbers for banking and signups, so you stop handing your real number to every app that asks. Go to cape.co/chained and use code unchained for 33% off your first 6 months.

[00:31:16]So last week we talked about the UK's big moves in kind of effectively putting together a crypto regulatory regime. We are still hoping and praying one day we'll be on an episode talking about the implementation of clarity in the United States. We are not there yet. But as the United States still discusses clarity and as it sputters along, we might talk about that later if we have time. Other countries are advancing and the biggest news as of late is Japan. So Jesse, tell us more. What is going on in Japan? So crypto in Japan's growing up, guys, and let's talk about how great Japan is and how great it is to visit there. And now it's much easier to use crypto there, which is great because for years, Japan treated crypto like cash in your wallet, like a payment, even if it was being traded, right? As of July 15th, which was a long time coming. This is not like an all of a sudden immediate news.

[00:32:18]They've been working on a long time, but it's more being treated like stock in your portfolio because the government, which it's called diet there. I don't know how many people know that, but I sort of love it. um they passed the financial instruments and exchange act.

[00:32:34]This is largely really good news for those who haven't been sleeping on the Japan market who have access to it. You know, importantly, I'm comparing it to stocks for framing, but it doesn't mean that crypto is all securities. In fact, they have been working and spending a lot of time to create a new financial instrument category for crypto.

[00:32:55]Interestingly, if we go back to 2017, a much simpler time in the world, I guess, um, Japan actually passed its first crypto law back then. It was one of the first major economies to do so, and people thought like Japan is going to be a really hot spot center for crypto, but the rules didn't quite work, especially as crypto changed and it didn't end up being the payment that I guess they had anticipated it was going to be. So now we have a huge packet of regulations um on what they realize is a much more complex asset class. They event essentially passed like a clarity genius package and the topline item that's getting all the news is like a true gift that is a true longtime coming because crypto gains in Japan used to get taxed as high as 55%.

[00:33:48]It's obviously very very high. Now it's a 20% flat rate for gains and that is huge for people who want to use stable coins or people want to like financial institutions that want to get involved in Japan. It's it's a really big deal.

[00:34:02]There are also rules that come with it because when you grow up you also have rules associated with you. Um I'm not going to go through them in detail. A lot of them repeat and rhyme with what's happening around the world. But you know, issuer rules, insider trading, and really strong criminal punitive measure me measures like you can be in jail for up to 10 years if you operate in unregistered exchanges. So they are taking this seriously and this has been years in the coming. So in other words, the tax carriage is really big and the regulatory stick is much heavier which really just means the space is maturing, right? And there has been a major response already. Now, as I said, this was a long time coming, so it's not like the switch just flipped, but it has cleared the runway for spot crypto ETFs, the Tokyo Stock Exchanges getting involved, etc. And it's not just trading desk money. What came out today is that the company that runs Amazon deliveries in Japan is about to start paying a huge chunk of the drivers in yen stable coins, which is like already sort of showing the real after effect of this law that was just passed. And you know, we said don't sleep on Apac because it's obviously Japan is not the only country in Apac because they have this huge package that came out last week, but Korea is also writing a digital asset act. Hong Kong is licensing a number of providers right now, not to mention the progress that's being made historically in Singapore and Australia. And I mean, we we spent a lot of time on this pot talking about what's happening in the US. And obviously, those are important, but I think it's also important for us to increasingly recognize the real impact and like efforts being taken by regulators around the world.

[00:35:46]>> It's really well said, Jesse. I think there's a couple big takeaways from Japan. Like one, it's very interesting to me when you look at Japan. It's become one of the most interesting crypto jurisdictions in the world. Not because it's the most permissive, like not because companies should be flocking to Japan, but because they have, I think, a very forwardlooking view on crypto. Now, some people might not love it because they're not betting on crypto verse tradi. I I would take this as they're betting on Tradfi institutions issuing like tokenized assets, programmable instruments on chain. And I I love that. I mean, the other thing that we're seeing with them is you're seeing massive Japanese financial institutions launching tokenization initiatives. We're talking bonds, deposits, like digital securities, tokenized securities, and the regulatory framework that Jesse just reviewed. It supports these products. It actively seeks to grow these products. It actively seeks to integrate them into a trady regime, but not in a punitive way.

[00:36:57]Like, it's very different. It's not like shoving them into the securities laws.

[00:37:00]It's accommodating how they're different and fostering an environment where this growth is seen as positive. So I almost I almost treat it as akin to how the United States treated the growth of the internet versus how the United States is treating the growth of crypto right now.

[00:37:17]Very different posture.

[00:37:19]>> Yeah. And the yen is a really important currency in financial markets. It's a marker for a lot of things. And so the fact that there are so many really powerful stent yen stable coin products um should be called stens maybe um are that are being launched by you know banks that are linked to you know the government in Japan which is sort of how a lot of their big banks operate there and there's consortium to like try and figure out how to get these sends I don't know if I'm going to make that happen um work but through that I think it's going to become really operational and crossborder in important ways.

[00:37:57]>> Yeah. And huge potentially for institutional flows long term especially if their stables and tokenized assets are interoperability are interoperable with US frameworks other major jurisdictions that they could grow to become a key hub. Um, and you know, the last thing I'll just note about this is I think a lot of people are comparing this to Mika, you know, because it is seen as crypto friendly, but it's very different philosophically. Like again, Japan is seeking to integrate assets onchain into the existing financial system into the existing regulatory regime and how to, you know, kind of further onchain assets that you know kind of support the growth of these assets. Ma instead is asking how do we regulate crypto? Like treating it as a different distinct industry. I think there's complete pros and cons there.

[00:38:54]Like I actually am not even sure I have a favorite. This is something I only started thinking about when I saw the news out of Japan. Uh I have to give that some serious thought as to what approach is better for the industry as a whole. I think most people in crypto would probably argue the Mika approach like treat it differently. uh there's probably more advantages to seeing it differently. I would agree unless the regime treats it differently in a negative punitive way which we have run the risk of doing that from the US perspective. The current version of clarity is not that but who knows.

[00:39:29]>> Yeah, the US has sort of gone on that journey too, right? Like I think under the last administration like people would always say like they're trying to fit a square peg into a round hole. Um, and so we've sort of come, I think, like a long way from that. Um, but I mean, we'll see where the legislation ends up.

[00:39:47]But I I agree with you like maybe it's actually the best approach is actually somewhere in the middle, right? Because crypto does actually present a lot of the same risks that you see in Trapfi.

[00:40:00]And so there maybe some of the same kinds of regulations or like consumer protection approaches make sense. But then at the same time, the technology does really represent different market structure and all this other stuff. So I I would say it's somewhere in the middle probably.

[00:40:15]>> It's it's such an interesting point guys like the EU just for context for everyone they have my which is much more for the financial instruments like securities and then Mika. Um, and I wonder if that can actually be seen as a comparison when the EU is like a set of countries and so they have to figure out a way to make it work for all different sort of regulatory structures and a lot of countries. I think we forget this because of how the US operates, but the SEC and the CFTC are one in a lot of countries and maybe the Fed is part of that too and maybe the [clears throat] DOJ is linked to that too. So like we have all these different letters and agencies to you know keep lawyers employed but at the same time like not every space works that way. So I want I I think it's a really interesting and useful thought exercise but I do wonder if like we can actually map it perfectly like that.

[00:41:13]>> Yeah, I think it will be really interesting to see what happens with flows in Japan. And frankly, it's hard to talk about APAC on this pod because a lot of the major jurisdictions are taking dramatically different approaches and it's somewhat fragmented. But what I am encouraged by is most of those approaches are pretty friendly or pretty or not necessarily exactly what crypto wants. But none of them are trying to stamp out crypto. And remember, I mean, I I I think we've all been in the space long enough to remember when there were multiple jurisdictions in and out of Asia that were actively trying to just make it go away. I mean, India keeps changing its mind. China keeps changing its mind. Australia has done some kind of scary things around crypto, but for the most part, I think everyone's like, "Okay, it's here to stay. How do we regulate this? Do we integrate it? Is it its own thing?" And frankly, this conversation has just really made me want to go to Japan because I have not been to Japan. Everyone knows I have itchy feet. I've been a lot of places.

[00:42:14]I've not been to Japan. So, >> it's amazing.

[00:42:18]>> 7-Eleven snacks. Soon you'll be able to buy it with stable coins, I guess.

[00:42:23][laughter] >> I've heard about that. Like the egg bread in 7-Eleven and the, you know, strawberry fluffy. I mean, I'm all about this.

[00:42:32]>> Oh, it's all so good. so much sodium and it's also tasty.

[00:42:36]>> Well, I've recently had to stop eating Taco Bell, so you know, I mean, there are worse things than eating from an immaculate Japanese 7-Eleven. Okay, [laughter] so it's been a rough few days here in America, guys. We have wildfire smoke.

[00:42:50]We have lettuce poisoning us. Like, moving on to something more positive.

[00:42:55]The >> Jimothy, I knew I was gonna bring up Jimothy. You knew it. Okay, we just really have to BREAK >> THE ONLY THING saving us all right now in a really tough tough time.

[00:43:07]>> This is not our crypto good news or a spine problem. I just like can't everyone when you need a smile and when you want to really see like perseverance, go watch these videos. I just have to say we did not give our awesome producer enough of a heads up to put a photo or video of Jimothy, which is Seattle's beloved raccoon with a spinal disorder. So, he's like a very like he's like a raccoon that is the circle and he's inspiring a lot of fan accounts and memes and I too love it.

[00:43:40]But I did almost nyx that for cryptog good news because our cryptog good news we're on in the hour is actually cryptoreated. But yes, go Google Jimothy with a J if you need a little pickme up.

[00:43:52]Maybe you've eaten some Taco Bell lettuce and you're on your couch. I don't know. Okay, so moving on to our next topic, which is a really good one and a really important one is kind of on theme because we were dancing around tokenization when we were talking about Japan. We haven't talked about tokenization all that much on this pod because a lot of tokenization is really just proof of concept. Um there there's there's a lot of revenue and activity with tokenized money market funds. Thank you. We have a we have a video of Jimothy.

[00:44:25]>> That is Jim.

[00:44:26]>> Save that for later, too.

[00:44:27]>> Sorry, guys. I'm sorry.

[00:44:30]>> We've seen real traction with tokenization with tokenized money market funds and treasuries, but a lot of other tokenization. There's been news of major consortiums and major institutional activity for years, but that's changing a little bit. We're seeing more. V. tell us why we should be talking about it now.

[00:44:48]>> Yeah, so uh last week DTCC, which is the institution that clears and settles pretty much every every publicly traded stock in the US, announced that it had successfully processed live production transactions using tokenized securities.

[00:45:04]um and JP Morgan and Goldman and Black Rockck, Citadel, CME and like I think a dozen other or dozens of other major market participants were involved in this. Um and their the DTCC's tokenization service is launching later this year. So, you know, on on one level, this is exactly what everyone had expected. Like, you know, we've been talking about tokenized securities for years and DTCC has been ramping up its own involvement for like the past year or so. So, I think people have been really closely watching that. But the first thought that came to my mind when I saw this like finally happen is is this game over for everyone else trying to tokenized public equities, right?

[00:45:47]Because if you're a DTCC, you're it's you're not just another company company issuing tokenized stocks. You are the infrastructure. Um, so I think this really is something different. Um, and there's actually a really important legal distinction here too, right? Like a lot of the tokenized equities that you see out there today are rappers. Like they're offshore structures or they offer like synthetic exposure to the actual underlying equity. And they're all workarounds to the problem that the real stock still exists in the traditional financial system. So what DTCC is doing is fundamentally different, right? They're they're tokenizing the actual existing DTC entitlement, meaning the actual book entry interest that already represents ownership of pretty much every public security in the US. So they're not trying to recreate the securities markets on chain. They're just bringing the existing securities markets on chain. And that might I think that sounds like a subtle distinction, but it's actually a really big one, right?

[00:46:53]So I think you know one of the biggest unanswered legal questions around tokenized equities has always been like which token is the real one, right? So if you have five companies out there tokenizing Apple stock, who has the right one, right? Who's who's keeping the authoritative ownership record? Um what happens if one custodian fails?

[00:47:15]What happens if there are two tokenized versions that diverge? And these aren't they're not just technology questions, right? These are legal infrastructure questions, right? So, if your business model right now is we're going to issue a tokenized version of Apple stock, I just I think with what DTCC is doing, that's just going to become increasingly difficult. um because DTCC has the canonical ownership record and I think you know institutions will almost certainly prefer that over a rapper that's issued by some other startup or another company. Um it's just cleaner.

[00:47:53]Um so I'm I'm personally like really interested to see how what DTCC is doing how that's going to change the tokenization landscape which is just you know it's all that anyone can talk about right now. Um, I think something else interesting will happen if everyone eventually has access to the same tokenized asset, right? And that sort of stops being the competitive differentiator for the market. I think actually this is where the really interesting part comes in and you'll see where the real value occurs, right? The question then becomes like what can you do with it? Can you use the tokenized equity as collateral? Can you lend against it instantly? Can you cross margin it with um crypto assets? Can you settle it 24 hours a day? In other words, like can you build entirely new financial products around it? Right? So, you know, I say this a lot, but like tokenization is a means and not an end.

[00:48:48]Like this is the hard part and the really interesting stuff is not the tokenization itself, um but all the things that you can then do with the asset once it's tokenized. Um, so yeah, I mean I'm curious to see to hear what you guys think like if DTCC does become the canonical source of tokenized public equities. Does that you know what does that mean for cryptonative approaches to this and all of the companies that have been working on this for a while now?

[00:49:18]>> Yeah, I think that like if you want a true representation of a stock like it should be up to the issuer, right? And like I otherwise you're not getting the same rights that come with it. And so it's sort of two different products in my mind. And in many ways what DTT DTC and many others like figure has been doing where they offer like a tokenized version of their stock that is actually the stock like gives you something versus like some sort of created financial instrument that gives you something different as long as you sort of understand what your rights are. So I'm not sure if it's going to be two separate things. Um but I do think like having DTC involved makes it very very different calculation on what this market could look like.

[00:50:09]>> Yeah. I think also like right to so today there aren't that many um tokenized equities that were natively like IPOed on chain. There's like a handful, right? But obviously that is going to change over time, especially with the SEC coming out with a clearer regime for this. So I think as you see more tokenized equities actually IPO on chain. So they're they're natively onchain from day one. That that obviously is like a a part of the market, right, that like these companies can still uh seize on and that that is separate from what DTCC is doing, which is tokenizing existing off-chain securities.

[00:50:46]>> Yeah. Yeah. Well, and look, a big part of this, and I feel mixed on this, in that if DTCC becomes the backbone of tokenization, like how it's the backbone of securities infrastructure, I think this makes crypto look very different.

[00:51:03]Meaning, it doesn't look like DeFi anymore. Like, there's not DeFi integration. It's institutional finance.

[00:51:10]So it it's it's Black Rockck and NASDAQ listed stocks and bonds moving on to blockchain rails. It does not mean like retail, DeFi, wallets, permissionless trading, like all of the aspects that we have known to come and love in crypto.

[00:51:29]So that it's a tough call because it it it looks like a it's a very different landscape than I think a lot of the market participants in crypto envisioned when they were envisioning the core tenants of crypto. Uh the other interesting thing of course is that look DTCC is unlikely to wholly dominate this. I mean DTCC although it is dominant has major competitors including arguably cryptonative competitors. I'm calling Canton cryptonative. I'm using that loosely because it's really owned by digital asset which is owned by Don Wilson of DRW but you have other competitors including public blockchain.

[00:52:09]So it creates fragmentation which then creates questions about interoperability.

[00:52:15]So I think it's great to see institutions embracing tokenization but there is so much confusion around all of this conceptually like V you mentioned this but just this whole concept of tokenized stocks that we see so much about lately so many people fundamentally misunderstand what is the actual product when someone is talking about a tokenized stock and the vast majority of the time it's a tokenized depository receipt which means the stock the share is sitting in a trady custodian and the token just means somebody has a right to it. They don't have any of the other rights that you get with a security. People miss that very important palpable point.

[00:52:57]>> Yeah, we need to have a good guest on to like help explain that like a little more. I think um yeah, the SEC issued some guidance earlier this year sort of distinguishing between these different kinds of quote unquote tokenized equities. And I I think it might end up being a part of the rule if they ever propose it, the project crypto rule. So we will definitely hear more from them as this whole space like heats up.

[00:53:22]>> We are waiting waiting waiting for project crypto especially because the latest news out of Washington is not looking good for clarity. So we may only have project crypto and you know guidance from the regulators to go on which by the way is very hard to future proof. I'm just gonna keep saying that.

[00:53:39]But I don't know what you guys have heard. There was a lot of headlines on crypto Twitter as usual that were completely inaccurate deceiving about this big meeting for an ethics compromise. And you know, as a refresher, there's a few different issues creating issues for clarity. One is argument over whether an ethics provision should be inserted into clarity. One is ongoing discussions surrounding the yield compromise. and one is law enforcement concerns surrounding the part of clarity that is designed to protect developers. But TLDDR >> like the things it's a lot. I mean I heard we're supposed to get language tonight, but I've also heard that about yesterday and last week. Um obviously people who are getting their news from some place that might be rhymed with witter or [laughter] um made the markets uh react to the fact that this may happen like other than all the specific categories that you talked about that still need to be worked out plus the fact that the two houses need to also agree the number of days left for Congress in session session is really minimal. Like there is the summer break coming up. There's other things coming up. Not to mention the midterms, not to mention all the other political issues being worked through right now, like the Iranian war votes keep coming up. So, I I like to be an eternal optimist, but I don't know if I'm as optimistic at these markets today.

[00:55:18]>> Tick tock, tick tock, Jesse. Spot on.

[00:55:20]We're like at the end of that Jeopardy song playing and it's running out and we don't have an answer or we're scribbling on the Jeopardy. Okay, I'll stop. But everyone >> Oh, I like when you don't know and you just are like, "Hey, Mom."

[00:55:33]>> Yeah. Yeah. Exactly. Thank you.

[00:55:37]Oh god, I hope Jenz is are watching Jeopardy because like I love Jeopardy.

[00:55:42]It's still on every day >> and so good. I HAVEN'T WATCHED IT IN A LONG TIME, but I still >> doing great filling in. Yep. So, we are almost out of time, but we could not end our segment without our crypto good news. Okay. And this week it it really is crypto good news. Uh I think everyone in crypto is aware of Zack XBT and he's basically an onchain investigator and you know he's he's actually brought a lot of good to the space. Um he is known for kind of uh creating kind of I don't want to call them exposees but he's a pseudonominous blockchain investigator.

[00:56:27]I should make that clear. He nobody knows who he is and he specializes in tracing uh transactions on chain to uncover scams and frauds and hacks and stolen funds. Okay. He is highly respected in cry in crypto because he's basically akin to a crypto investigative journalist. He breaks big big big big scoops before traditional media announces them and he's uncovered some major issues like scams and memecoin insider trading for example highly relevant to his good news. So what keeps happening is that a bunch of people keep making meme coins using his name and likeness. And I don't know, maybe they're using Robin Hood chain, which was, by the way, originally built for real world asset tokenization and institutional trading, but is getting enormous flows from memecoins. I I wouldn't exactly call that good news. I would have to get Robin Hood's take on that, whether that's good news. But anyway, so people keep making Zack XPTt meme coins and they're without his approval. And what I think came to light recently is, and this has apparently happened numerous times, he actually gets these donation coins. He liquidates them and well, in some cases, I believe in some cases he's a he's able to give them directly, but he donates them. And his most recent donate donation was to give directly through the giving block.

[00:57:54]So massive functionality to actually donate crypto to support victims of the June 24th earthquakes in Venezuela. So this this whole situation has revived debate over impersonation tokens, but we feel like we needed to shout him out from B he basically took something bad and took something kind of inappropriate, something he didn't like and and you know turned it around to something good. So, shout out to Zach XPTt for all of your good investigative work and now for your charitable crypto donations.

[00:58:25]And on that note, we're going to end a little early today because we've just stuffed this episode full of goodies.

[00:58:32]Can't wait till next week. It's just going to be Jesse and V and maybe a guest, TBD. But don't miss it. We'll see you next week on Decks in the City.

[00:58:52]Ding.

[00:59:02]Heat.