Oct 17, 2023

CoinDesk's State of Crypto Week, presented by Chainalysis, is focusing on the future of crypto regulation in the U.S. Multicoin Capital general counsel Gregory Xethalis discusses the lessons learned, the road ahead for crypto legislation and the impact on future development of crypto policy.

Video transcript

This week, Coin desk is taking a closer look at what's next for the state of crypto regulation that's presented by chain analysis. Joining us now to discuss is multi coin capital, General counsel Gregory Exis. Welcome to the show, Gregory. Thanks for having me. All right, we are talking um about the Sam Baker free trial this morning. Last year, we learned that well, at the beginning of this year, sorry, the time just all blurs together for me these days, uh Multi coin capital's hedge fund lost 91.4% last year due to exposure to FTX and holdings in F TT and sole based tokens. How do you think this trial is going to set the tone for the industry especially when it comes to regulation in the US? Well, I think, uh you know, not going to talk about multi coins particular circumstances in relation to it, but clearly the FTX collapse and the trial is having an impact on the development of policy a week from now. We'll be in DC at Coin Desk, state of policy discussing, you know, what, what the path forward is. And uh I really applaud coin desk for this event, in particular, having a concise event with uh a highly curated uh agenda and bringing both regulators uh legislators as well as participants from trade associations and both traditional finance, as well as the digital asset ecosystem together to discuss the path for path forward. And clearly there is a desire and a need for a regulatory framework that allows businesses in the US to operate and compete and do so with level playing field, uh the opportunity to innovate and by virtue of coming within that regulated uh uh scope, providing additional consumer protection and uh business standards that we would expect of American companies, but may not always see for companies that operate outside the US. But just to sort of bring up the obvious point here, which is related to what you said is that FTX obviously was not a US company and I know people are saying that, well, you know, we need better regulation in the US so that these F txs don't attract people. But I kind of feel like that's not the most compelling argument, that's like a great argument on paper. But the truth is is that like there's always going to be these sort of offshore entities, right? And actually, I think that the devil's advocate side is like the stricter it, ok. So say we all the crypto advocates dream comes true, right? And like the US actually has a regulatory framework for crypto and it's really strict and it looks more like Japan or Singapore, right? And it's easier to operate in exchange that actually, in some ways you could argue just increases the likelihood of these sort of offshore wild West exchanges where you can do like way more exciting things with leverage. Right. So it's kind of like the, you know, like how, how does really having a regulatory framework in the US really solve the FTX problem? Did you see what I'm saying? Like I know it sounds like it does, but I'm not convinced that it actually does. You're not going to have huge leverage perks that some people want on a US regulated exchange that's not happening in the near term. And there are some people who will be drawn to that. There will be listing standards that are different for exchanges that are global than are in the US. But there is something to be said for uh the, the soundness and regulatory certainty and the lack of certainty makes it more difficult for people to invest and build in the US and build compelling products. We have seen uh a handful of us entities have success building products. Coinbase. Coinbase being perhaps the best example, but we've also seen success from uh Gemini and Paxos in building good product that struggles to compete because uh you know, markets can access these offshore platforms that have less restrictions and less costs. Um I, I don't think it's a, a panacea to have regulation. But I think if we focus on the low hanging fruit, the simple centralized entities looking at things like stablecoin regulation, which is a clear, immediate need. Um as well as things like title three and four of the Responsible Financial Innovation Act, which go towards uh investment contract status and being able to operate a US exchange with a central federal regulator. Because one of the aspects that makes it very difficult also to business in the US is you have 53 different regulatory authorities that you have to adhere to each of the individual states or 49 of them. Uh the district of Columbia in three territories, if you want to operate a, a truly national exchange. And that is, that's difficult when I was in private practice, I represented exchanges uh from time to time and the process of getting on boarded and dealing with 53 or 54 regulators. Instead of one is a very, very difficult thing. The, the, the market conditions right now with the collapse of FTX and, and Terra Luna, it removed a lot of uh leverage in the market. It made it sort of I I we're seeing it now, volumes are incredibly low. Does that buy time for regulators to deal with this problem in a different way than they would have had the market been hotter? I mean, we're talking, of course, people are looking at the ETF potentially launching but so far it, the volumes on the spot exchanges are nowhere near what they were before the collapse of FTX. Does, does this buy a little bit of time for regulators to sit there and, and think it long term or, or remove some pressure to get it done right away, especially uh especially now when we have two wars, uh global wars and uh right now happening that Congress has to focus on, I think there, there's some validity to that in that uh you know, the actual interconnectedness of a lot of the digital a ecosystem to tr fire rails is somewhat limited. We saw that last August, I believe it was or, or June uh fed Chair Powell um testified before Congress indicating that uh the, the Terra Lua collapse did not have a significant impact on on the traditional financial system and systemic risk because there is, there aren't a whole lot of ties. We can't rely on that to stay that way forever, particularly when we're talking about truly centralized exchanges and centralized activities such as Stablecoins where we have to move quickly because it's not necessarily going to be just regular in the room. We need Congress to take some action and create frameworks for things like federal preemption of state regulation. A really core issue for stablecoin issuers, digital asset trading platforms and digital asset custodians again, to avoid that scenario where you have to deal with 54 different regimes instead of one. Um So I, I think we can't rest on our laurels, but we can perhaps have some satisfaction that the Nancy and infancy of the industry, uh, means that we, we have time to try and get it right. But we can't sit on our hands. We've got to move quickly. I think that's the theme for, for next week is ensuring that the right people are in the room having this type of conversation. And, um you know, hopefully coming out with takeaways that help move the ball forward including on uh you know, some legislation in the house, which appears to be bipartisan. I want to bring up one more theme that came from the contagion. Um That was part of the knock on effect of FTXS implosion. It came up again in Saman and Fried's trial over the last two weeks and that is due diligence. Um There is this big question about how V CS were looking at due diligence when they all got involved with FTX. Now, there's this question about how uh folks in the industry are approaching due diligence in a post ftx world. How are you looking at due diligence as we move forward? What are you doing differently? So, uh you know, processes change always, I I'd rather not go into the specifics of how we think about things, but we always try to do a best in class uh operation in every aspect of what we do, whether that's legal finance investing um and we take our responsibility very seriously. All right, Gregory, Gregory, we're going to have to leave it there this morning. Thanks so much for joining the show and we'll see you at the state of crypto.

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