The State of U.S. Blockchain Regulation with Hyperliquid Policy Center

Mason Nystrom sits down with Jake Chervinsky, CEO of the Hyperliquid Policy Center and former chief policy officer at the Blockchain Association, to break down the three policy battles that will define crypto's next era: perps, prediction markets, and the CLARITY Act.

Hyperliquid is the most exciting thing built in crypto. Perps are a better derivative than futures, options, or swaps. Prediction markets are a better product than sportsbooks. And yet Americans can't access any of it. That is the problem Jake is in Washington to fix.

Key Topics:

• Why Jake joined the Hyperliquid Policy Center: perps are a better product than anything traditional finance has built, they settle instantly on a public blockchain, and Americans can't access them
• The path to regulated onchain perps in the US: the CFTC's crawl-walk-run approach, why perps are futures not swaps, and what equity perps require from both the CFTC and SEC working together
• CME vs the CFTC: why the Chicago Mercantile Exchange sued to block perps from trading on registered exchanges, why Jake thinks the CFTC has both the stronger legal and policy argument, and why CME is competing in court instead of in the market
• Prediction markets vs Vegas: why the CFTC has jurisdiction over event contracts as swaps, why 50-state regulation is unworkable, and why Vegas is lobbying hard to protect its sportsbook model from a better product
• The CLARITY Act: 90-95% of the details are sorted, the two remaining sticking points are ethics provisions around Trump's crypto activity and developer protections for DeFi builders, and the do-or-die timeline before August recess
• Tokens vs equity: equity is for off-chain value, tokens are for onchain value, and the magic of crypto is building products where all the value is fully onchain

00:00 Why Jake Joined the Hyperliquid Policy Center

04:57 The Path to Regulated On-Chain Perps in the US

17:03 CME Sues the CFTC to Block Perp Trading

21:02 Prediction Markets vs Vegas: The CFTC Battle

26:29 The CLARITY Act: Status, Sticking Points, and the August Deadline 

The views expressed in the podcast are those of the individual personnel quoted and are not the views of Pantera Capital Partners LP or its affiliates ("Pantera"). The podcast is provided for informational purposes only to provide market commentary and for general educational purposes, and should not be relied upon as legal, business, investment, or tax advice. The podcast is not directed at nor intended for use by any investors or prospective investors and may not under any circumstances be relied upon when making a decision to invest.

Transcript

SPEAKER_00 0:00

This is true for any founder, but I feel like it's 10x for DeFi founders. You're just gonna get raked over the coals all day, every day. No one's gonna understand what you're doing. You're gonna, you know, fight and scrape to get product market fit. But like there is a light at the end of that tunnel, and I think what we're building in this industry is truly world-changing, and you just have to push through all of the craziness and all the garbage and really believe in what you're doing.

SPEAKER_01 0:26

Welcome to Safeful, a Pinterest podcast where we talk about everything at the intersection of finance, venture capital, and tech. I'm your host, Mason Nystrom, and today we have an amazing episode for y'all, jam-packed with the current regulatory state of the crypto markets. And for this one, we have the one and only Jake Travinsky. But before we begin, a quick disclaimer. This content is for educational and entertainment purposes only and does not constitute financial investment or legal advice. Please do your own research before making any investments. Now, Jake needs no introduction, but I'm gonna give it anyway. So Jake has had a storied career. Uh, he was initially general counsel at Compound Labs, which, for those who remember, launched one of the initial liquid liquidity mining programs that kicked off DeFi Summer. He eventually became chief policy officer at the Blockchain Association, which is one of the leading advocacy advocacy groups in Washington, D.C. Uh, and then Jake and I actually overlapped at Variant, uh, which is another early stage crypto fund where Jake was chief legal officer while I was an investor. And so I've had the pleasure of working with Jake. And he's now jumped into a new role as CEO of the Hyperliquid Policy Center. Now, because I know Jake so well from working with him, I will take the first words out of his mouth. Jake is a lawyer, but he is not your lawyer. This is not legal, financial, or investment advice. Jake, welcome to the pod.

SPEAKER_00 1:34

Mason, thanks for having me, and thank you for front-running my disclaimer. I appreciate it.

SPEAKER_01 1:38

Of course, anytime. So, Jake, as I mentioned, you just jumped into a new role uh as CEO of the Hyper Liquid Policy Center. And I think it'd be helpful to level set for the audience, you know, why did you decide to go full-time uh into this and maybe kind of state the HCP HPC's kind of uh you know stated goal?

SPEAKER_00 1:58

Definitely. So the Hyperliquid Policy Center is an independent nonprofit. We are a research and advocacy organization focused on allowing Americans to access on-chain markets. And as you know, of course, the Hyperliquid Policy Center, despite being independent, was also funded by the Hyperliquid ecosystem. So we are working very closely with others within Hyperliquid, including Hyperliquid Labs. But really, what we want to do is advance policy for the wide world of folks who want Americans to be able to benefit from decentralized infrastructure for the trading of financial products. And our main focus, also, as you might expect, is on perpetual futures, which are not the only product that trade on hyperliquid, but definitely the most popular and the one that made hyperliquid a sort of a household name within the crypto industry and increasingly so within finance more broadly. And in terms of why I wanted to do this work after a number of years working in crypto, including, you know, Mason, the time that we spent together at Variant, was because to me, hyperliquid really is the promise of crypto instantiated in a product that people want to use, not because it tracks some, you know, ideological ideal about DCEN or dissension, although it certainly does provide those things, but because it's just a better product than the traditional financial system was able to produce. And I spent so long working in crypto, you know, seeing products that people wanted to use more for those libertarian ideals or for, you know, ethical or moral reasons. And I admit that I share a lot of those reasons. That's what brought me uh into this space in the first place, but that often were not competitive with the products that a traditional financial institution was offering on a centralized back end. And then Hyperliquid shows up and starts offering 24-7 trading in perps that settle instantly on a public blockchain that provides self-custody and transparency and all those benefits of public blockchains, but also are providing markets on non-crypto assets, right? This is not just an exercise in speculation or you know, trading within the black box of crypto, but really something that I think can and will reshape the global derivatives markets, which are the most important markets in the world, not just for finance, but for global trade. And despite all those benefits, hyperliquid in in terms of the perps product is not available in the United States because the commodities laws here do not allow the trading of financial instruments like perps on chain. And I viewed this as an amazing opportunity to get engaged in policy here in Washington, DC, where I'm based, to try to ensure that Americans can benefit from this technology the way that everyone else around the world is able to do that.

SPEAKER_01 4:56

Yeah. And as you mentioned, perps have, you know, were not a new idea to crypto, but crypto really mainstreamed that product into the market that has now since evolved to trillions of dollars in volume a year. It's you know becoming an enormous asset class. I think that, you know, if you look at the perps market, it is a product that has the potential to replace a lot of zero-day options volume or even like levered ETS products because it's just a better product, as you say. And, you know, you mentioned a lot of this volume today is offshore. And so maybe talk a little bit about you know what the pathway to a more US regulated perps market looks like and how we get to, you know, the US being kind of the home again for these types of derivatives.

SPEAKER_00 5:35

Yeah. So I I think it starts with an education challenge. And so, you know, you and I, having been in crypto as long as we have, uh it's easy for us to say perps are a better type of derivative than you know, futures and options and swaps. And I do think that's obviously true to those who understand what perps are, right? They provide significantly deeper liquidity because you're not fragmenting liquidity across many different instruments that have different aspirations. You have a lot simpler of a product to understand. So, unlike a traditional future that converges with the spot price over time as it gets closer to XPRE, or unlike an option, which is, you know, still sort of hard for me to explain how to understand pricing an option, right? The benefit of a PERP is that it very closely tracks the price of the underlying asset and it doesn't expire. So much simpler product and therefore better for most users in most cases. Not all, you know, there's still a use for deliverable futures and cash subtle futures and uh options for many people in many cases. But the first thing is just to explain to people who don't know what perps are here in DC that this is a legitimately beneficial instrument that is another tool in the toolbox of people who are using the derivatives markets to speculate or to hedge. And then we have to figure out how do we adjust the laws and regulations to allow for the trading of perps in the US, not only on a traditional exchange that is registered with the CFTC, but also on-chain on a public blockchain like hyperliquid. And the the main issue there is in the way that the commodities laws are constructed today and the ways that the CFTC, the Commodity Futures Trading Commission, which regulates derivatives markets in the US, have implemented those laws, which is on the assumption that there will be an intermediary that is offering the product in a centralized way through a traditional backend. And of course, a public blockchain can't walk into the CFTC and get a license as a designated contract market. It's inanimate code. And it's really not appropriate for the developer of a public blockchain to act as a designated contract market because they don't have control over the blockchain in the same way that a legacy exchange has control over its back end. Nonetheless, the commodities laws do require that there is some intermediary that is offering this product. And the CFTC has a regulatory framework that it needs to enforce, which was set out for it by Congress. And that means we have a lot of work to do with the CFTC to figure out how do we connect these products offered on public blockchains with that registration and regulatory framework. And that is work that's ongoing now. I think that the benefit is we have leadership at the CFTC, and I should mention the SEC as well, because equity perpetuals are also a pretty popular uh product, and that falls within the SEC's remit. We have leadership at both of those agencies that genuinely believe that upgrading the financial system by moving finance on-chain is a meaningful upgrade for the financial system in general. And they are engaged in what they call project crypto to try to figure out how we can change uh the regulations to allow for this type of uh activity in the US. So there's a lot of political will to do it. It's just that the devil's in the details. And so it's probably going to take longer than folks think to figure out uh how exactly we can make that happen here.

SPEAKER_01 9:14

And you mentioned equity perps. I think this is probably the thing hyperliquid has become most known for in the broader traditional financial space. You know, today hyperliquid does billions of dollars in volume a day, and actually a significant portion of that is on you know perps for equities like SK Heinex or indices like the SP 500 or NASDAQ. You mentioned that there's gonna be this kind of joint jurisdictional agreement that has to happen when bringing equities perps to the market. And so I'm curious, like, you know, if if bringing regul just traditional perps to US market is gonna take, you know, X amount of time, like what is the additional complexity to bringing US equity perps to the market? And how do you kind of think of the current state of uh you know those organizations and and how much support they have here?

SPEAKER_00 10:02

It's definitely more challenging when you have to have two different agencies working together to make progress on new regulation than any single agency. And you know, that's that's true even now where the SE are engaged in in what they've described as harmonization. Uh, and and both Chair Atkins at the SEC and Truman Sealig are clearly very committed to ending what historically has been this turf war between the two agencies fighting with each other over jurisdiction for these products. And now we really do have a situation where the agencies seem to be working extremely well together in cooperation and collaboration to figure out where are the lines. Nonetheless, when you have to have two agencies that are working on the same problem, it does add a lot of complexity. And I think it does require more time. The legal issues around perps are also definitely more complicated when you think about equity perps versus pure commodity perps. And so the CFTC has already come out about a month ago or so and said in two actions, one related to Cal Sheet, one related to Coinbase, that they do view perps on digital assets as futures, not as swabs. And that's sort of the first issue that we have to uh deal with. What is the classification of a perp? Is it a future or is it a swap? This is critically important because, and to uh give uh sort of an overly simplistic but hopefully helpful explanation, futures are products that are accessible to retail, and swaps generally are not accessible to retail, they're an institutional product. So if we want few if we want perps to be able to trade for a retail audience in additional to an institutional audience, we have to uh view them as futures. And thankfully, when you look at the legal precedent, it is pretty clear that perps are futures, not swaps. And the CFTC did an extraordinarily good job in those orders explaining why perps, again, on digital assets are futures rather than swaps. Then you have to go over to the SEC and apply the same reasoning when you have perps on equity underlying as opposed to digital assets underlying. And I do think that the analysis tends to come out the same way, but security futures are a totally separate regulatory classification than futures that the CFTC regulates, with their own regime that's implemented by the SEC and in some cases dual regulation over the instrument or the venue where the instrument is going to trade. So this is all stuff that the agencies have to work through. And I think as excited as they are to see these new and innovative products come online in the US, they are also appropriately cautious about allowing too much too fast. And so we do have to figure out, and I think what will be an iterative process that the regulators often describe as a crawl, walk, run process, how we're going to get these instruments available in the US. And we probably are going to crawl a little bit before we walk and then before we run. So it'll take some time, but I think the agencies are working on this pretty hard right now.

SPEAKER_01 13:12

And so with that framing in mind, what do you think the future of this crypto market infrastructure looks like as uh people interact with these, you know, more decentralized financial rails? And so, for example, I think one thing that we've seen is the rise of neo brokerages, where you have you know brokerages that are trying to tap into hyperliquids liquidity to offer these products, but you know, not uh but in the same way that neobanks didn't kind of own the banking rails. They're not trying to own the regulatory rails of you know what is the traditional perps or you know, futures or swaps markets. And so is that kind of like the is that analogy of neo neobanks to neobages a similar framing that you see playing out in the market? Or how would you frame it to the listeners?

SPEAKER_00 13:57

Yeah, I think um I think the best way to think about it is in this way the regulators describe it, crawl, walk, run. And I think the idea that we're gonna go straight from there's no such thing as a regulated DeFi product in the US all the way to there is full exemptive relief for everything related to DeFi. There's no regulations. The agencies are just gonna look at these products and say, you know, everyone can just have at it. That's just not how the US capital markets have ever been regulated. And these markets, especially when you're talking about derivatives, are just too important systemically, not just to the United States, but to the world. As I said, the global derivatives markets are the linchpin of how global trade works. I think it's too much to expect that we're gonna go, you know, from zero to 60. So I think that it will be an iterative process where these products come online in a way that allows the agencies to see how the markets develop and then take iterative steps further and further as they get comfortable with these products, you know, being safe for investors and for consumers, uh, and being well regulated and having good insight into what's going on in those markets. This is exactly why I think we see the CFTC begin with orders that say perps are allowed, but they're only allowed to be traded on already registered DCMs or through a foreign board of trade that is in a very particular structure. The CFTC described and was comfortable with as offered by Coinbase through its uh foreign board of trade deribit. And also perps only on digital assets, not perps on any other type of commodity. You know, at least as of this moment, the CFTC had not authorized perps on energy or on metals or on agricultural commodities. And similarly, the SEC has not come out yet to say that they that they will authorize the trading of perps on uh, you know, any type of equity, whether in the US or otherwise. And I think that the agencies are very open, and and the CFTC said this in its orders to folks coming in and explaining what is the next logical step, and you know, how can the CFTC get comfortable that whatever that next logical step is, whether it's expanding the types of products that are offered. So, you know, the the perps on oil, for example, may become very popular on hyperliquid, perps on silver were uh for a time extraordinarily highly traded on hyperliquid. Uh, so you know, whether we can expand to other types of underlying commodities or maybe equity products, and then the rails where the assets can trade, right? Can we start getting settlement and clearing and trading on chain as opposed to through a centralized backend? I think all of that is gonna come later down the road. And then I think the other point that's important to flag is the pushback that we will see from the legacy in who are not a fan of innovation, because innovation is a challenge to the regulatory mode that they use to protect their market share. And so, you know, we're talking about the uh the CFTC's orders related to Cal Shi and Coinbase, but the CME, the Chicago Mercantile Exchange, which among friends, I will say acts something like a monopolist in the derivatives markets, it has an extraordinary amount of market share and protects it not by coming up with a better product for its consumers, but by trying to box out any disruptive innovation that might take away its market share, has already filed a lawsuit against the CFTC, challenging the determination that perps our futures that are all allowed to trade on registered exchanges. So it's not just getting the regulators comfortable and having them do the very hard work of figuring out what do regulations look like that expand access to more of these types of products and in more uh types of venues using different types of technology. It's also pushing back against those who are going to say, we don't want to see this in the United States because it's a threat to our business model.

SPEAKER_01 18:02

And where do you think, if you have an opinion that the CFTC kind of nets out uh against the against CME's regulatory pursuits?

SPEAKER_00 18:15

First I'll say I think it is quite sad and disappointing that CME decided to take this approach. You know, if you look at what the CFTC did, they authorized any DCM that meets the right criteria, including the CME, to offer these products. So if the CME wanted to compete in an open and fair and free market, they could just list these products as well. And what they've decided to do, instead of competing in the free market, is to run to court and say they need a judge to protect them from competition. And this is, I think, the first reason why the CFCC is very likely to prevail in litigation against the CME. There is this concept of competitor stand-in. There are limited cases in which a plaintiff can bring a lawsuit that says that there is some action by an agency that that results in increased competition and they can file a lawsuit on that basis. But often, and according to a lot of case law, you can't bring a lawsuit just because there is some action. That means you are going to have a harder time competing against others who are offering an honest and well-regulated product in the market. And so I think the CFTC has a really strong case against the CME just based on standing. I don't know that the CME has the standing to bring this challenge. But then also on the substantive point, the CME makes this argument that perps should be treated as swaps rather than as futures, which would mean that they cannot be listed on a registered exchange. And I think they just have the wrong perspective as a matter of law. I think it's clear if you read the CFTC's orders, they did a lot of really excellent work to explain why a PERP is properly treated as a future. You know, a futures contract in general is a standardized contract that trades on an exchange. It's the type of contract that is fungible. So, you know, any one contract is the same as any other. It's a contract that can be offset in, you know, by taking an opposite position. And perps have, you know, all of these sort of Homer characteristics of a future, not a swap. And I think the seeing these arguments why a PERP ought to be treated as a swap, uh, you know, sort of betray the fact that they are just trying to get a, you know, an advantage through the courts over their competition rather than having a bona fide view as a matter of law. So look, we'll see what happens in court. These types of litigation, always really hard to predict. It all comes down to what one judge thinks and then what happens in the appeals process. Um, so you know, hard to know what's going to happen next. But I think the CFTC is in a pretty good position to fight this one.

SPEAKER_01 20:50

Yeah, certainly we would hope that innovation wins a day and that uh monopolies or oligopolies have new entrants that are able to provide better, better market products. The you know, related battle that is going on is among another financial product that crypto's kind of pioneered in in prediction markets. Um, and so this has obviously had its own intertwining uh regulatory battles among states versus the CFTC. And so I think it'd be helpful to give the listeners just the kind of the current status of you know prediction market regulation and how you think kind of the regulatory landscape is gonna shape out between the CFTC and the states. And for context like that's mostly around you know sports-based event contracts and whether those should be regulated under state gambling laws or at the federal level.

SPEAKER_00 21:40

Yeah.

SPEAKER_01 21:40

Great question.

SPEAKER_00 21:41

So I and just to give a little context, one of the reasons why you're absolutely right that the argument has mostly focused on the sports markets isn't really so much a legal issue as it is a political question of where the interests are. And the interest really Are in the state gaming commissions and also the tribes that have generated a lot of revenue and the state's tax revenue by virtue of the fact that they are able to offer these products that historically have not been offered by CFTC registrants. And so the reason we focus on the sports markets isn't necessarily because sports markets are unique in some legal way, but rather it's because that's where the money is and that's where sort of the fight has focused. But ultimately Vegas is unhappy. Vegas is not happy. Vegas really liked its sports gaming business and it doesn't want to lose it to a bunch of uh to a bunch of prediction markets, even though, by the way, the product that a prediction market is offering is better for the consumer than the traditional sports book that's being operated. I think that ought to go without saying that where you have, again, a bona fide market where you have people trading against each other, and instead of the uh operator of the market sort of stealing money from everyone who's trading by running their own book and trying to get an advantage on anyone, instead they're getting paid fees for a service, much more honest and much more beneficial business. So I'm, of course, uh a big fan of prediction markets as opposed to the traditional sports book model. But the legal question is still a very interesting and important one. It's different from the question around perps for the reason that event contracts, which is the type of derivative that a prediction market is offering, are classified as swaps by definition. So there's no argument that an event contract can or should be classified as a future. That doesn't mean it can't be traded on a registered exchange. A registered exchange with a CFTC can trade a cleared swap, which event contracts typically are. But the question is a different one, which is whether it is actually appropriate to describe these event contracts as swaps as opposed to a gaming product traditionally regulated again by the states. And to me, again, I think that the legal question falls on the side of the CFTC because, again, event contracts are classified as swaps, and the CFTC has jurisdiction to regulate markets for swaps. And that is true regardless of the type of event that the contract references, whether it is the closing price for a digital asset on some day at some time, or whether it is the occurrence of some world event or the weather or the results of uh you know the a game in the World Cup or something of that nature. And so I think that the CFTC is also legally very likely to prevail once all is said and done. I also think from practical perspective, it just doesn't make any sense that you're going to have 50 different states with 50 different regulatory frameworks for what are the same market across all of those different jurisdictions. This is the reason that we have federal regulation for national markets. And the idea that a prediction market needs to go and register with all 50 states and then comply with you know 50 different types of regulations for that same product, again, will result in a significantly worse product, likely with less liquidity, perhaps that doesn't cross you know every state boundary. And that just doesn't make sense from a policy perspective. So I think the CFTC has both a better legal argument and the better policy argument. But as we're saying, because there is a lot of money on the other side of that issue, I do think that there's going to be a lot of litigation. The CFTC's in court all over the place on this right now. We're starting to see Congress take up this issue. So there are, you know, members of Congress who have constituents that care a lot about this issue on both sides. And, you know, some members of Congress who are starting to propose or think about proposing legislation that would explicitly take jurisdiction away from the CFTC for these types of markets. I wouldn't think that that type of legislation is likely to pass anytime soon. But I think it just demonstrates how much pressure there is and how big of an issue this has become in Washington.

SPEAKER_01 26:09

Yeah, it's certainly uh a lot of parties are obviously interested, but I think, you know, it sounds like the CFTC, you know, based on legal precedent, is potentially uh in the right here. And so hopefully we will see again innovation prevail uh and better market structure form for uh not only sports betters, but you know, all event contract traders. I want to transition a bit and talk about maybe the broader crypto market structure in the Clarity Act. And so, you know, for people who maybe haven't been following it as closely as uh you or I have, you know, what is the latest in the Clarity Act? What are kind of the sticking points that are currently still unresolved?

SPEAKER_00 26:50

Sure. So I'll I'll start by saying I'm jealous of anyone who hasn't been following this very closely because it's been taking up all of our brain space in Washington for what feels like ages. And indeed, we did start working on market structure, well, initially back in maybe 2018, when I saw the very first ever version of crypto market structure legislation. Uh, and we've been, you know, working on it off and on here here in DC ever since then. But the the goal of the Clarity Act for those who are new to this issue is to finally provide regulatory clarity for the primary issuers of digital assets. So people who are creating, distributing, selling tokens, and then also for the secondary market participants who create the market structure where those assets trade or where they are custodied. So exchanges, custodians, brokers, dealers, and others of that sort. And of course, the problem all along has been that the laws and regulations that apply to traditional finance and to securities just don't make any sense in the context of a non-security digital commodity, which is what the vast majority of tokens are. And something that the current SEC has recognized, but as we all know, uh those of us who are in crypto during the last administration, the Gary Gens SEC have the exact opposite perspective. And it's it's really unpalatable, unacceptable to have a meaningful industry in the United States that sort of changes dramatically in terms of its regulatory posture, just depending on the whims of whoever is in charge at a given agency at a given time. And also where the people building the technology and working in the space fundamentally don't understand how they can comply with the laws and regulations because no one has explained to them how they can do that. So the Clarity Act is meant to solve that problem. As of now, right.

SPEAKER_01 28:45

Maybe just to put a fine point on that, like what you're talking about is agencies have typically ruled from what's called forward guidance, which is what you're saying can change from administration to administration. The importance of this type of market structure and legislation is to provide a land in the sand that builders, founders, and entrepreneurs and companies can like understand like these are the rules of the road that they can play by uh without having to see those rules of the road change on a whim every you know two to four years.

SPEAKER_00 29:12

Exactly that. And you know, even worse than that, in in the last administration, we didn't even get forward guidance that could have changed. We got regulation by enforcement where builders in good faith had launched products and found out that the agencies didn't agree with how they had done it when they got sued in federal court. And that was uh, I think intended as a chilling effect on the industry to make people feel uncomfortable building in this space. And you know, you and I, Mason, you know, we work with founders all the time, right? Your job is uh in part to help your portfolio understand how they can succeed in this space. And I, as a lawyer, having you know represented and advised many founders, need to know what the agencies think about the law in order to help founders understand how to build compliant products. So that's what we need. And the Clarity Act would give us that in many ways. In terms of where we are with the Clarity Act right now, I would say 90 to 95% of the details are sorted out and look great. So the bill has very clear rules and regulations for how a company can create and sell a digital asset without having to worry that it will be categorized as a security that is unlawfully unregistered. It has very clear rules for how centralized intermediaries like exchanges and custodians can register what they have to do in order to protect consumers. There are really clear protections for developers so that they will not be misclassified as intermediaries when in fact they do not control user funds or control a protocol in the way that a typical regulated intermediary would. And, you know, a number of other details that I the industry has worked really hard on to try to figure out in the bill that looked really good when the bill came out of the Senate Agriculture Committee and the Senate Banking Committee, the two committees of jurisdiction in the Senate that are were working on the bill over the course of this year. The bill now has to go to the Senate floor. And in order to pass in the Senate, it will need 60 votes. And what that means is you need at least seven Senate Democrats who will vote in favor of the bill. Now that sounds like a pretty small number. And a version of the Clarity Act was already passed out of the House of Representatives about a year ago with a bipartisan supermajority. There were more than 70 House Democrats that voted in favor of that version of the Clarity Act. So you would think this is a bipartisan effort and there's going to be Democratic support for the bill. But actually, it has been very difficult for the Senate majority that's been advancing the bill, the Senate Republicans, to find seven Senate Democrats who are willing to take a yes vote on a crypto bill. And unfortunately, that is in large part not an issue of policy. It is again an issue of politics. The problem is that this is a priority for President Trump. He's declared that he wants the United States to be the crypto capital of the world. And his top priority at this point is getting the Clarity Act done and heading into the midterms in a few months. It's really hard politically for Senate Democrats to give President Trump a win by voting yes for this bill, even though they don't really have very strong objections to the bill from a policy perspective. That said, there are two main issues that are holding up the bill now. And uh we can get into the details of them, but just to flag what they are. The first and main issue is around ethics or conflicts of interest. Senate Democrats want the bill to have some type of provision that will prevent the president and his family from doing business in crypto. And the details are still outstanding. So there's not, at least as of the time that we're talking about this, a clear deal on what that type of conflicts of interest provision would look like. And then the second big issue is around those developer protections we mentioned. So it's absolutely critical for the industry that software developers are not treated as intermediaries when they are not engaged in the activities of an intermediary. And yet some members of Congress look at DeFi developers and want to classify them as if they are intermediaries, even though they are not. And so there's a lot of argument about some of those developer protections in the bill that are still outstanding. So we're we're not really sure yet uh if there's going to be a deal on the bill.

SPEAKER_01 33:40

And one of the other maybe contentious issues that sounds like was figured out was around stablecoin and yield passing. Where did that land? And you know, what was kind of the compromise that was reached between banks and you know, uh advocates of stablecoins and being able to pass yield through?

SPEAKER_00 33:56

This the stablecoin yield issue was a big one. It um it definitely delayed the bill for a number of months as the banks um were fighting with the industry. And uh really it was you know, Jamie Diamond and Brian Armstrong and in sort of a personal feud um over how this uh this set of provisions would come out. The and just to give some context, um the Genius Act is the bill that Congress passed last year, comprehensive regulation for centralized stablecoin issuers. It had a provision that basically said it was not lawful for the issuer of a stable coin to pass yield directly to the holder of the stable coin. And this was something the banks wanted because they view stable coins as a threat to their business model, which is taking deposits, right? They didn't want a stablecoin issuer to be able to pay interest because they figured that there would be more demand for stable coins, less demand for deposits if the stablecoin is paying more to the holder, which does make some sense. Naturally, yeah. Better for the consumer, worse for the banks. So the banks, you know, turned their lobbying function on and they got that provision in the Genius Act. The thing was, after the banks negotiated that provision, they decided it wasn't good enough for them because it didn't absolutely comprehensively ban any stablecoin holder from getting yields in any circumstance. It just said that the issuer can't pay yield directly to the stablecoin holder. So the banks came back in the market structure bill and said, we want even more, understanding that this bill isn't even about stable coins, we want to insert a worse restriction around yield paid to stablecoin holders. And sparing everyone the back and forth and uh and the negotiation, where it landed in the bill was essentially to say that even third parties that have customers holding stable coins. So, for example, Coinbase, which is not itself a stablecoin issuer, but has many customers who are holding USDC on platform, basically said Coinbase can't pay interest to stablecoin holders just by virtue of the fact that the holders have stable coins. The holder of the stable coin has to engage in some type of activity in order to justify the payment of interest. And maybe that's uh engaging in trading, or maybe it's you know paying for some type of subscription or engaging in some other business with a company that will then entitle them to payment of stablecoin yields. And honestly, even after getting that you know greater restriction on stablecoin yield, the banks apparently were still not satisfied and have still come out and said this is too much of a threat to our business model for us to accept. So the banks are still out there lobbying against the Clarity Act in its current form. But that's sort of where the stable coin yield issue got resolved. And the members of Congress seem to have decided this is good enough. We've worked this out and we're okay with uh with how it came out there. So I think that that issue will not stop the Clarity Act from moving forward.

SPEAKER_01 36:50

And then I guess final question on the Clarity Act is so currently, you know, polymarket odds are at 46%, 45% to pass. Do you think that is an accurate reflection of where we're at today?

SPEAKER_00 37:00

I would say yes and no. I think on the one hand, it sounds a lot like a coin flip. And uh these things are sort of a coin flip. I I can't tell you that I have a good sense whether the bill moves forward or not. I think it's a good bill. I think it should move forward. I think that most members of Congress who are looking at the substance of the bill agree with that. And I think that there is an extraordinary amount of political desire and pressure to get something done. And so I think that all of that ought to add up to a pretty good chance of passage. On the other hand, in my experience in Washington, having been here for you know long enough to be dangerous, these things are really hard to get done. They just always are. The saying is there's 10,000 ways for a bill to die, and there's only one way for it to get done. And, you know, sitting here right now, I can't tell you that there's a clean shot at uh at getting this thing passed, really because of time running out. Um, you know, we're we're sitting here in July, we're heading into the midterms. Members of Congress are gonna leave DC for the month of August. Um, they always do. And when they come back, there's very little time before they're really on the campaign trail, which is, you know, already starting, and very little gets done in DC heading into an election. So I think we're gonna know by the end of this month, maybe by the first week of August before the Senate is in recess, whether this bill is gonna move forward. And if it hasn't been voted out of the Senate by that uh first week of August, I think it's very unlikely that it's gonna move forward. So we'll we'll know a lot more in a handful of weeks.

SPEAKER_01 38:33

And then if it doesn't move forward, what is the pathway to getting a renewed version of the bill or market structure passed?

SPEAKER_00 38:43

Opinions differ about this. The expectation, and it's always tough to be in the prediction business. Um, this is what the prediction markets are for uh when it comes to elections, is that the Democrats are very likely to retake control of the House of Representatives. And at the end of this Congress, the Clarity Act that was passed during this Congress will expire. So in the next Congress, starting in January, we would be starting from scratch again in both the House and in the Senate. And it's just unlikely to imagine that a House of Representatives controlled by the Democrats is likely to advance a crypto market structure bill that the industry would support. And if the industry doesn't support it, it's not going to happen. So I think the conventional wisdom is that if the bill doesn't get done in the next few weeks, meaning it's not going to get done this Congress, then it's not going to get done during the Trump administration. And we're going to start talking about this again in 2029, depending on who's in control of Congress and who's in control of the White House. So this is sort of the do or die moment for market structure legislation. I think the positive view, though, to the extent that sounds negative to folks who, you know, believe that the next bull market depends on market structure legislation getting done, I am not one of those people. I think that the benefit is that we have the SEC and the CFTC, both agencies that are engaged in, as we were discussing, project crypto, a holistic effort to bring finance on chain. And although they would benefit greatly from having the additional authority and regulatory clarity that would come from market structure legislation, they already have a lot of statutory authority to get a lot of this work done. And so I think no matter what happens, we're still going to see a huge amount of progress in updating laws and regulations in the US for the benefit of crypto builders and investors over the course of the next couple of years. So I think no matter what happens, we should be optimistic about where crypto policy is heading in the next couple of years.

SPEAKER_01 40:44

Yeah, absolutely. And I've truly the next bull market uh or you know, positive price appreciation is gonna come from two things inevitably. It's like great companies building the space and great assets accruing value. And you know, on that note, I think we've seen kind of this dispersion of equity and tokens over you know the past several years. It seems like we've now, in terms of like the incentives of like having a token and also equity and you know, the incentives over time dispurging uh between those two kind of assets. It seems like we're now moving to this one asset model. There's been a few different instantiations of it. One is hype, which is you know taking a significant portion of you know revenue and buying back token on the open market. You have other models like Morpho, where there it's a nonprofit and there is kind of no actual you know equity instrument that accrues value. And so, you know, from your perspective, how do you think about the you know token versus equity debate and where we're converging? I I know you've written a lot about this in the past.

SPEAKER_00 41:40

Yeah, I think um I think both equity and tokens are great financial instruments for different purposes. And I think this is where this gets confused. I think the magic, the unlock of a digital asset is that it allows the holder of the asset to own property without reference to some business that they need to rely on in order to deliver profit to them, or some person they have to ask permission in order to exercise the powers that they have over the property that they own. The owner of a digital asset can own on-chain infrastructure. It really is an instantiation of digital property rights, much more so than it is in the equity context, the evidence of governance rights or the ownership of a particular business. And I think that what is exciting about crypto is the ability to create on-chain infrastructure that is genuinely ultimately owned by the people who have the tokens that relate to that infrastructure. And to me, if you're in crypto and you're building an on-chain project, what you should do is create the project in a way that gives the token holders ultimate ownership and control of all the value that is flowing on-chain. Now, look, sometimes a crypto company is going to build a business that relies on off-chain revenue, right? And there are many great crypto businesses that make a lot of revenue, and that revenue is not on-chain, even if they are offering a service that is related to a public blockchain. In that case, there really is no way to give the token holder direct ownership over that off-chain value. So to me, the sort of simple rule is equity is for off-chain value, tokens are for on-chain value, and the magic of crypto is building products that have fully on-chain value. And so to me, you don't want to split these two things. So you want to build one or you want to build the other unless you have a really great reason why you're doing both at the same time. But I think, you know, as we as we often tell founders, you want to build a great product that has great product market fit, not to try to build two separate ones at once. And that's why I think you should pick either equity or tokens, not both, as your value value occurring instrument in the project.

SPEAKER_01 43:56

Yeah, totally agree. And for context, that's you know, a lot of what we're guiding our. Portfolio companies to nowadays as well. I want to end with a uh quickfire where I ask a quick question or say a quick statement and get your you know immediate response. And so what's one piece of advice you'd give to any founder building in DeFi today?

SPEAKER_00 44:13

Push through. Just push through. This is a brutal industry to work in. It has been the whole time. That I mean, this is true for any founder, but I feel like it's 10x for DeFi founders. Uh, you're just gonna get raked over the coals all day, every day. No one's gonna understand what you're doing. Um, you're gonna, you know, fight and scrape to get product market fit. But like there is a light at the end of that tunnel. And I think what we're building in this industry is truly world-changing. And you just have to push through all of the craziness and all of the garbage and really believe in what you're doing. You know, the same as any founder, but again, 10x more than that. So push through.

SPEAKER_01 44:45

What's a policy position that you change if you could govern for a day?

SPEAKER_00 44:49

I would authorize trading of perpetual futures on-chain in the United States. So very self-serving pro-hyperliquid statement. Um, but look, I I like, I obviously think hyperliquid is the most exciting thing that's been built in crypto. And I've been, you know, around and watching this space for a really long time. And I think that people benefit from on-chain markets, and that's what hyperliquid is. Uh, and I think that we should have them available here in the US rather than Americans watching other people outside the country benefiting from them. So I would authorize the trading of perps on-chain here in the US.

SPEAKER_01 45:22

Totally agree. And then last question, what's something that you've changed your mind on over the past year?

SPEAKER_00 45:26

I think I've I've changed my mind about how much we can decentralize in this space. You know, I came to crypto as very much a you know true believer in the power of decentralization. I still am that. But I also think, you know, going back to my compound days, that we had this vision of the financial system totally absent, you know, not only intermediaries, but really absent anyone who had any element of either control or input into the system. You know, we had this idea that we were going to build these protocols that at the perfect moment, the developers could just walk away and then they would live on forever, unchanged, as sort of the permanent uh, you know, state of the financial system. And I think that's a very beautiful ideal. And I think it is also not realistic from a commercial perspective. I, you know, I think one thing that we've all learned uh over time is that products are only competitive if they are iterative. And the truth is that founders do not want to walk away from the products that they're building. They want to improve those products. And the day they stop improving those products is the day that some other founder shows up and builds a better product. And so I think what we have to do is square the benefits of a public blockchain and the benefits of decent with allowing founders to continue to offer and build on and improve those products. And so I think I think the shift in mentality for me is sort of away from this idealistic idea of DeFi and more toward the concept of on-chain finance. You know, the infrastructure is decentralized, but it doesn't mean that everything that's exciting in this space is gonna be decentralized or absent some person who's still working on that project. And I think that the concept of on-chain finance sometimes has been used as a pejorative to criticize projects that are not following that sort of maximalist ideal. And actually, I think that on-chain finance is where the exciting innovation is happening in crypto. And so that's that's gonna uh shift in my thinking uh over the last year or so.

SPEAKER_01 47:22

Yeah, absolutely. The market has matured and we have to be much more pragmatic about the benefits of you know being permissionless, being on chain, and it's that global access that is really important. Um, Jake, thank you so much for coming on the podcast. It was an amazing conversation. Uh, it was awesome being here, Mason. Happy to do this anytime. Thanks for having me. Thanks for listening to Stateful. Subscribe for more conversations at the intersection of finance, venture capital, and technology. And we'll see you next time.