Stablecoins, Crypto, and the Future of Digital Regulation

Episode transcript:

JOHN QUINN: [00:00:00] This is John Quinn and this is Law, disrupted. And today we’re gonna be talking about the intersection of cryptocurrencies and digital assets, and the law. And we have two people who are really qualified to talk about this and it’s really kind of a fascinating subject. We can’t possibly cover all the subjects that we might talk about here, but I think it’s gonna be really interesting. We have with us Avichal Garg, who’s the managing partner of Electric Capital, a venture capital firm up in the Bay Area. He’s also chairman of CCI, the crypto Council. , what’s the, I stand for Avichal for Innovation, the Crypto Council for Innovation, which is kind of an industry group. I guess does lobbying work and gets the, at the industry’s attitudes known to,  [00:01:00] people in the public policy world.

Emily Kapur is a partner at our firm, Quinn Emanuel. She’s in our office up in Silicon Valley and she practices a lot in this area, in the crypto subjects, in legal issues and litigation and regulation. As I said, there’s so many different things that we could talk about here. I mean, first off there’s a fundamental tension between the crypto world, the digital asset world, which focuses on deregulation and law, which we think of as more regulation, more, you know, laws promulgated by some kind of central authority.

Any sort of general observations on that kind of overarching subject? Avichal. 

AVICHAL GARG: I think,  by the way, thank you for having me, John. It’s good to see you.  Nice to see Emily. For anybody listening, this is sort of part two of a conversation John and I were having over [00:02:00] coffee once, and it spiraled into a lot of really interesting topics and so I’ll be kind of curious to see where, where we take this.

Maybe at the highest, highest level I think what is really interesting about these concepts is that this notion of crypto or digital assets starts to bump up against some really complex legal topics. It has notions of free speech baked in and where we draw the lines on that, it has notions of developer liability baked in.

So, you know, if a software engineer writes code and it’s open source and puts it out on the internet, that has implications in the real world these days, especially once code becomes money. And historically we thought of code as free speech. And so what happens when code is money and code is free speech and you know, math is code and these things start to kind of intersect, it gets really kind of nuanced and interesting.

It also starts to get at, you know, what does it even mean to have jurisdiction? Because some of these pieces of software run simultaneously in the same form in multiple physical servers across the world. So, how do we think about jurisdiction in this new world? [00:03:00] , and then therefore, which laws really apply,  I think is a little bit of a question.

It gets even at the idea of,  you know, what is a person or what is an entity and I think crypto and AI are sort of bumping up against the frontier of this, which is how do we think about regulations when the counterparty to a transaction can be a non-human entity, it can be a piece of code, for the first time.

We haven’t really had to think about a lot of these concepts, I would argue, since maybe the mid 1800s. When we sort of started to formulate the notion of limited liability corporations and corporate law and, you know, how does liability work and how does indemnification work and how does free speech work and can these entities participate in the political theater?

And there’s a lot of sort of interesting, open questions here that I think crypto and AI are now starting to bump up against that we don’t really have answers for, and we’re kind of figuring it out in real time. 

JOHN QUINN: Yeah, I mean, we’re dealing with legal categories, legal concepts that were really built for [00:04:00] fictitious legal entities,  like corporations and banks,  and contracts that are written in a prose language rather than a mathematical language. You know Emily, what are your thoughts on that? I mean, doesn’t this really kind of bump up against the foundations of legal authorities, and how do legal authorities adapt to this world where we’re talking about permissionless innovations and algorithmic governance. How’s that going to interface with law for these centralized institutions? 

EMILY KAPUR: Yeah, I really liked how Avichal framed this, and I think, you know, that’s it, it’s really the right way to think about it.

That in some ways, crypto, you know, has been on the scene a little longer than AI, and I think it tells a really interesting story at this point when Bitcoin was first released in 2009, [00:05:00] I think, you know, there was a feeling that. We would,  pretty immediately, see some major legal issues arising.

It actually took a long time and, and it’s been an interesting arc of seeing, you know, how the law is grappling with this technology over quite a while now. And, and the, you know, the first issues were really what is this technology and how does the law figure that out? 

JOHN QUINN: Is it a security? 

EMILY KAPUR: Is it a security?

That was the first, that was the first big question. We saw a lot of litigation on that question but now the courts are trying to deal with it. Sort of even more fundamental problems, you know, how do we deal with the jurisdictional questions when this technology is taking place everywhere, all at the same time?

When you have nodes that are part of the blockchain that are all over the world all at once, and how do you deal with systems that are autonomous where code can be written and sent out into the world and can continue to act and people can. With that code and undertake all kinds of activities, you know, some of which may be legal, some of which may be illegal.

[00:06:00] Where does liability lie when you have interaction with autonomous systems? And what do you do when the governance of those systems is really distributed across a lot of different people? Some people may be more responsible for what these semi-autonomous systems are doing than others. Is everybody equally responsible?

And those questions really go to the foundation of our, you know, our legal system. And one thing that I’ve found really encouraging, kind of watching developments,  in the recent period is that you see the law developing kind of in the way that it should. You see courts grappling with these big questions of, you know, what are these transactions?

And then you actually, in the US in particular, you see public backlash, sort of that, that some of these decisions coming outta the courts were really. Stifling innovation and that was not what we wanted. And there was actually a bipartisan agreement about that that was sufficient to support some new legislation.

We’ve seen this summer progress towards additional legislation and that’s really, you know, it’s remarkable to see. It’s what we hope will happen when the law [00:07:00] encounters breakthrough technologies that where there’s just sort of a mismatch between the types of decisions coming outta the courts and, and what the public wants to see.

So I think it’s exciting in that respect and, and hopefully bodes well for continued development of crypto law and AI as well. Which may try a similar path. 

JOHN QUINN: I mean, I think you were referring to the Genius Act, at least in part, as part of the response to public disappointment with the legal inhibitions on the development of crypto,  and that act addresses among other things stablecoins, which have been so much in the news lately. I saw an item today and this just kind of blows me away, that stablecoins, the stablecoin industry holds more short term US debt than China does. Isn’t that kind of an incredible fact? Yeah. 

How important. [00:08:00] , crypto law battleground the stablecoins issues now and there are all these proposals about who’s going to regulate stablecoins. Avichal what is the role of stablecoins and how do you see those raising particularly legal and, and regulatory issues? 

AVICHAL GARG: Yeah, well, this touches on a couple of really interesting things. I think, you know, maybe before jumping into that, I would preface by saying I am not a lawyer. And so, you know, I’m very much self-taught on all things. 

JOHN QUINN: Maybe talking about these issues, being a lawyer is a problem. 

AVICHAL GARG: It’s funny when you start, you know, I spent most of my career as an entrepreneur, so I’m, you know, by training I’m a software engineer and I’ve built a lot of software and, when I started on the investment side, we started Electric, you know, I thought I would get to spend a lot of my time with founders and doing the investing thing, which I certainly have. But kind of along the way I’ve had to pick up, you know, like a master’s in accounting and a master’s [00:09:00] in like, you know, law and master’s in public policy, you know, that like actually get the job done.

You have to just sort of go on these areas. So the stablecoin thing, I think it touches on there. There’s absolutely some really interesting things, legal questions here. You know, like, is this legal tender? Can you use it in a transaction? Who’s allowed to issue these things? You have sort of state versus federal,  jurisdictional questions and prison, you know,  presumption questions and so setting all those aside for a second, I think the history of this is pretty interesting.

So I’ve been involved in the stablecoin  stuff for a few years now, and,  back in 2019, I think I have to go back and look. I wrote a paper. On how the geopolitics of stablecoins would play out and why it was sort of a done deal that stablecoins would have to become legal and why that opened the door to these decentralized systems and what’s interesting is if you think about it for a little bit, you realize that actually stablecoins are a really, really powerful tool for national security for the United States. Because it’s the best way to get [00:10:00] dollars into the world ever, ever created. Right. Now what the United States can do is they can say, oh, this token, or I can just text you know, the cryptographic hash that represents this token can now get onto every single device in the world.

And I think one of the amazing things about the dollar is that it’s, you know, you know, they do these studies, they probably do this in law as well and I bet Quinn Emmanuel is right at the top. Like, what are the most valuable brands? So it’s like, you know, Google and Apple, whatever. Actually, the most valuable brand in the entire world is the US dollar. Because even if you hate the United States of America, you still want dollars right. It’s actually the best, the best currency. So you could be like the Ayatollah and you still want dollars, right? So, the dollar is this like really, really amazing, powerful thing that exists in the world.

And from the United States government’s perspective, he more people that have dollars, the more that you cement the ability for the United States government, for example, to do sanctions. And you might argue that that’s not, you know, you may not wanna live in a world if you’re on the receiving end of those [00:11:00] sanctions.

I would argue that it’s actually better than the United States dropping bombs on people like it, it is a tool of war, but you know, it’s, it’s probably better than us dropping bombs on people and there’s all this data too, if you’ve ever seen data on, you know, like Mexican drug cartels, having a single hegemonic cartel is better than having six cartels that all fight each other because the amount of violence will actually go up.

And that’s sort of a system where there’s like one, one hegemon sort of keeps violence down actually. But anyways, stablecoins are this like amazing, amazing tools for national security. So as we were having these conversations with, you know, senators and congresspeople in the White House over the last five years, very quickly you could see that as soon as people on either either party on either side of it got their heads around the fact that the dollar is a tool for national security and this is the best way ever invented to propagate dollars into the world, the light bulb sort of went off and you, you could see that they had to sort of say, oh, I get it we need to get dollars into the world. And, and it has both national security implications actually, because now you can do an end around, like if there, if there are countries. Where the banks don’t want their, [00:12:00] their citizens to have dollars, you can now just get dollars onto their phone, right? 

You can go around the entire system, actually, but the other thing that happens with this is that as soon as these people have dollars, they wanna buy treasuries, right? Because as soon as you have dollars, okay, you’re out of Nira or you’re out of Brazilian Royal, or you’re out of Turkish lira, or you know, Lebanese currency or whatever. Most of the currencies of the world, it turns out, are not that good.

You’d rather not have fiat in most of the world, you’d rather have dollars. And as soon as you get dollars, you say, wait a second, there are places where I can get 5% dollar yield. That’s crazy. That’s the best, that’s the best financial instrument I could ever possibly have in my country and so it also turns out from like a national security perspective and an economic perspective, the buyers of last resort for treasuries might actually be retail on the ground rather than central banks.

So to your point, John, while China might be dumping short term treasuries you can now have every retail person in the world buying short-term treasuries. 

JOHN QUINN: Yeah. 

AVICHAL GARG: And so once these two facts sort of like, you know, the light bulb went off for all the politicians and anybody who’s national security aligned,  in [00:13:00] government, they sort of realized they had to do stablecoins and then they started to hit all these sort of questions around the wall.

So what I think is really interesting about this stuff is it’s not divorced from some of these larger,  geopolitical questions, which, which are quite complex and interesting, I think, and, and we’re entering, I think, an entirely new world around that stuff too, because. For, let’s say post World War II, the United States operated in a particular way, right?

The country was dominant in terms of GDP and economy and Army and Navy and, you know, all of these things while Europe rebuilt and Asia came online. And we exist in a little bit more of a multipolar world now, and we’re sort of, I think, reckoning with that. Um. , and, and I think this stuff like all comes to head around that.

And so like, even the backdrop of how we think about the legal questions here, I think has to change a little bit because 30, 40, 50 years ago, the US could just say, we’re gonna do it this way. We have the world’s deepest capital markets. We’re the rule of law. We have the biggest navy, like, you gotta do what we say.

And it turns out that doesn’t work anymore. Like I don’t think you can just dictate this stuff in the way that you used to. 30, [00:14:00] 40, 50 years ago, we sort of saw this with FTX for example, where, you know, the US tried to push. Crypto out and say, we don’t want this.  and that was, I think, a huge mistake by the Biden administration and so what, what people did was they just picked up and left. So they just set up shop in The Bahamas and created a company that looked like an American company, and for all intents and purposes, behaved like an American company, but was not subject to any American oversight. There was no, there’s no jurisdiction there.

Right? So how, how, how’s the SEC or how do regulators or auditors do anything, right? There’s just no oversight. And that’s the reality of this new world. And so like not only do we have to think about the legal issues, we actually have to have a, a slightly different framework, I think, around these things like stablecoins where we can’t as, as a country, dictate what the rules are in the same way that we used to 20, 30 years ago.

So all that sort of, you know, the geopolitical stuff, they’re like backdrops of the reality of being in a multipolar world. And then the technology and legal questions all sort of come together in this really interesting way, which is why I think we have to rethink a lot of them. It’s like if we’re having these conversations 25 years ago.

I think the answers may have been very different from what the [00:15:00] answers are forced to be today because of this backdrop. 

JOHN QUINN: Yeah, I mean, it’s, it’s fascinating because it seems like the development of stablecoins both in some ways is a, is a feature that,  supports and extends US dominance and the dominance of the US dollar in some ways, but also undermines, US dominance from a regulatory standpoint, at least under the way we think about regulation now.

Any reaction Emily? 

EMILY KAPUR: Yeah, I mean, I think, you know, for all those reasons, the Genius Act was really important and, and it was so great to see the bipartisan support behind it and it is creating, in some respects, it’s creating even more tensions. I mean, the, you know, the Italian finance minister has said that US dollar based stablecoins are more dangerous than tar because you know, depending on the numbers, you look at 98 or 99% of all stablecoins are dollar denominated. And the Europeans are really [00:16:00] struggling with that. And in Mecca, they created all these requirements in order for stablecoin issuers to be able to operate in Europe, they need to hold reserves in Europe.

 The Genius Act, interestingly, didn’t impose those same requirements. I think because they don’t have those same co we don’t have the same concerns.  But it’s a huge deal to have gotten this legislation passed to create, you know, an on-ramp in the US for all these companies to kind of come within the fold and like Avichal said, you know, not be forced to kind of set up shop overseas, and have a US hat, while not really operating under anyone’s jurisdiction. And, I think there’s, you know, there’s a lot of interesting economics that surround all of this as well and, and it looks like, you know, we’re taking a really good approach.

I mean, we’re making it possible for stablecoin companies to continue to have very profitable businesses, which is going to encourage them to stay in the us,  which is, I think, you know, it, to the advantage of the [00:17:00] country,  and certainly to the advantage of, of the US-based,  crypto markets. And then there are, you know, fascinating issues kind of within the country between the stablecoin folks on the one hand and traditional finance on the other.

There’s a lot of concern on the part of traditional finance that there will be huge outflow from banks into stablecoins,  because of the economic structure, because of these concerns about an affiliate loophole that makes it possible for people to earn, you know, for consumers to,  to earn significant interest on stablecoin holdings that aren’t currently available through banks.

So I’ll have to see how that plays out, but I, but I think the really big picture is that, you know, with the Genius Act we’ve now created. , a regulated way for stablecoin issuers and for the entire ecosystem surrounding dollar based stablecoins to, to operate legitimately in the US you know, with, with a regulatory regime that’s manageable,  so that the costs you know, aren’t, aren’t going to be exorbitant.  and [00:18:00] hopefully allows for an array of market participants,  rather than kind of an overly concentrated market. So, we’ll, we’ll see how that plays out. It’s gonna take about three years for all the provisions to come into effect.  and so there will certainly be more developments over that time, but I think everyone agrees that this is a great first step and next step is market structure legislation. 

AVICHAL GARG: Yeah. One thing which I totally agree with is, you know, this, this also gets at this idea of, you know, anytime a new technology comes in,  we have an implicit decision that we have to make as a society about which legacy structures, which were created by regulation we want to retain.

So the banks are a real interesting example here, right? Like, I think in a lot of the country, these, these, like small community banks perform a very important function. They’re willing to underwrite small businesses in rural America. They know those people. And so there are like signals that they have around credit worthiness, for example, which are really important.

[00:19:00]  And so they’re a really important part of that community, right? Like the, who’s it is it,  what’s the name of that? The Christmas movie. It’s a Wonderful Life. That guy’s a banker, right? Absolutely. And so like people forget, like that’s what it means to be a small town community banker is like you’re an integral member of that community.Like you’re the reason people can buy houses, just a really important function in society. Right. At the same time, the bank’s business model is to take deposits from people and, and pay them like 0.1% when, like the base rate is 5%. Right? And, and like to make that spread and that doesn’t seem fair.

Like why, why is that? Like why do the banks just get to make 4% for, you know, giving their customers 0.1%? That also doesn’t seem great, right? So, and if you look at like, where banks make money, a lot of these mega banks are really profitable.  you know, they’re not, they’re not starving and where do they make money?

They’re certainly not making off of rich people, right? They’re making it off of things like ATM fees from people who don’t have any money. So, so it, it does start to like highlights, well wait a second. We have a way that you can [00:20:00] just keep money on your phone and you can make 4% on it instantly. Better, but then we’re giving up the community banks.

And so, you know, like I think the banking intersection is really interesting here because I dunno the answers to all these questions, but I think there are some interesting societal questions rolled in here. I certainly, I’m obviously biased, I work in this. I certainly don’t think the answer is that the banks should be able to continue doing business the way they do.

It’s not clear to me that that a lot of what they do, namely holding deposits at 0.1% in a savings account is good for the customer or is good for, you know, good, good for the end user. And there are better ways to do this stuff now. But I also recognize that these community banks in particular, these small community banks have a really important function to play in society.

I don’t know the answer, but, you know, those are the kinds of things that I think we’re gonna have, even in something that’s obvious at state, maybe the way to say it. Even in something obviously good as stablecoins for national security and for the US dollar and all those kinds of things, we have some really hard trade offs.

Once you start looking into the hood, you’re like, okay, well which banks get to survive or, which banks get to play here? We don’t know the answers to those things yet. 

JOHN QUINN: I mean, banks [00:21:00] face all kinds of challenges right now you know in corporate lending. Now you’ve seen the whole private equity world with their credit funds,  doing a lot of the premium lending that used to be done by banks. So this is just one of many challenges that our traditional banking institutions are gonna be facing. How about, let’s talk about where crypto is going to be traded. Avichal you made reference to, you know, FTX,  out in The Bahamas.

I mean, what kind of marketplaces are we gonna be looking at? What should they look like? And who’s going to regulate them then? Doesn’t there need to be some central authority somebody needs to regulate? What will these exchanges look like and what will the rules be? 

AVICHAL GARG: It’s a good question. I think there are gonna be, there’s actually three categories of venues, I guess you could say, in the market.

So the middle of the road is one of the most obvious ones that people think about, it’s maybe like a Coinbase or a Kraken or an FTX, [00:22:00] which is effectively a crypto native exchange. It deals in the underlying assets, it has custody of those assets.  and because many of those things are commodities, some of them may be securities, the sort of technical architecture, the legal, technical architecture is, is different than like a Nasdaq.

Or, you know, a CFTC regulated exchange where you have kind of like a DCM, FCM kind of structure and, and like the exchange has to be separate than the, than the clearinghouse. And there’s sort of all these legal constraints that have been put in place to protect the market and protect the consumers.

And on the crypto side, in part because of the way the technology works, you don’t have those separations. So Coinbase can, Coinbase, if you look at it as a business for example, or Kraken, if you look at it as a business, is simultaneously like a NASDAQ,  and a State Street and a Charles Schwab all put together, right?

It’s a brokerage and a clearinghouse and a custodian and an exchange all put together. So that’s kind of, I think, what people think of crypto. Now, there’s two other variations that are emerging. One is traditional Wall Street and so what’s happening is there are [00:23:00] all of these traditional financial wrappers that are happening around the assets.

ETFs being one example, but there’s a new generation of wrappers called DATs,  digital Asset Treasuries. These are companies like MicroStrategy, which are just buying Bitcoin on the balance sheet. And over time the core business basically becomes managing those assets.  There’s,  on the other side,  there’s a guy named Tom Lee that’s been running this with a company called Bitmine Immersion Technologies, and he’s, he’s up to a couple billion.

There’s one that we’ve helped,  called ETHZilla, which is ETHZ. And what these guys do is they go buy the assets and, and then they manage them and they generate yield on them. And all of a sudden the market says, oh, wait a second this is actually because the ETFs can’t generate yield on their assets, this is actually a better way to hold the underlying. And so what’s happening is that you’re seeing capital flows switch away from ETFs into these digital asset treasury companies. And so those, you can just buy in your 401k or in your Schwab account. It’s just, it’s just a ticker on the stock exchange.

So we’re seeing like a different form of these get wrapped and put back into stratify. And then all the [00:24:00] way on the other extreme,  you know, across, back over coin based, go to the other extreme, you’re seeing the decentralized version, which is autonomous code that lives on a blockchain that’s available 24/7 that anybody in the world can participate in.

And those things also let you trade these assets.  and you’re seeing a lot of international markets participate there a little bit in the US you know, there is significant volume from the US but that’s a global market and, and that looks quite different from the traditional markets. You know, it’s the, the, the conception that we have in our head at least is it looks kind of like if you took Wall Street and all of Wall Street ran on one database and had all the same data structures and anybody could write code against it. So the APIs and the interfaces and everything, like everybody really understands and everybody’s sort of reading from the same data, and you get a lot of efficiencies as a result of that. And you get a lot of experimentation and so you have, you know, you have, protocols, like if you take something like a UniSwap,  or Aave. UniSwap is a decentralized exchange, Aave is a lending protocol. 

You know, there, like if you look at, let’s say a, I’d have to go [00:25:00] look at the numbers, but it’s, you know, tens of billions of dollars in outstanding loans. And if you had a traditional financial institution, and these are collateralized, fully collateralized, actually over collateralized loans, if you had a traditional,  lending business that was doing this, you know, on Wall Street, you might have hundreds or a thousand employees on, on a business like that to do that kind of volume.

And, you know, there’s probably a dozen people that manage that protocol, you know, in terms of like, have written the code. So you have phenomenal economies of scale, you know, like a dozen people can, can run a business that manages tens of billions of volume, which is pretty crazy.  and so you’re seeing the market sort of along this whole spectrum and,  you’re seeing,  different market participants pursue different, different interfaces, essentially.

Some people going, you know, like kind of under 40. The millennial crowd goes to Coinbase or a Kraken. If you, if you have a traditional brokerage,  and you have a 401k and you have assets and you’re trying to figure out how to get, you know, wealth managers or institutions are sort of going the traditional route and a lot of the international markets and a lot of the, the software people are going the decentralized finance route and [00:26:00] writing code against being able to trade these assets. And so all, all three of these are sort of developing in parallel right now. 

JOHN QUINN: Emily, any thoughts on those? What, what, what the exchanges will be?

Where, where will these things be traded and, and, and what will the regulatory regimes look like? 

EMILY KAPUR: Well, I think Avichal’s hitting on just how fast the market structure is developing in all of these different directions and, and I sort of, part of me wonders if we’re, you know, if, if any legislative developments are already gonna be years behind, by the time, you know, they, they get anywhere.

JOHN QUINN: The law has a hard time keeping up with, . 

EMILY KAPUR: It does. And, and you know, there’s some really important discussions happening in DC that I’m sure is a part of market structure legislation that, you know, at core, I think the primary issue is trying to resolve this. turf war between the SEC and the CFTC,  and figure out, you know, is there gonna be kind of a primary [00:27:00] regulator in this space?

Right now, you know, arguably there’s, there’s no regulator or there’s two regulators or,  or perhaps others, you know, there’s some others who I think also wanna be involved.  and that’s been an issue that’s been outstanding for years and, and I think there’s. You know, a fair amount of agreement that needs to be resolved, perhaps not the same impetus on the national security side as with stablecoins. And so I think it’s, it’s been slower to kind of reach resolution on, on exactly how to resolve this, but in some respects, as Avichal was, was laying out, you know, the technology and the market structure is moving so quickly that, you know, in some ways some of these discussions may be a little behind where, where everything is going right now.

 I also think some of the discussions are not focused on some key issues that we keep seeing pop up on the litigation side. Just that, you know, the disputes that are arising.  There are different kinds of disputes. I mean, you know, there’s of course this question about various types of crypto transactions or securities transactions.

But we also see [00:28:00] again and again questions about, you know, where are all these projects? And, market participants subject to liability, you know, is, is there actually jurisdiction in the US? Do the US laws reach this conduct? You know, are they, are they subject to liability everywhere? Are they subject to liability?

I’m not sure actually that the current discussions are really gonna tackle that question at all. Now, perhaps if eventually we get to a world where, you know, we have regulatory regimes that, that are covering these businesses in Europe, and we have them in the us, we have them in Asia, you know, that, that may help the courts to kind of resolve some of these questions just from a practical perspective.

But as a litigator, that’s something that I continue to worry about. It’s really hard for clients to know, especially when you know their activities touch. They’ve got customers and all over the world, they’ve got operations all over the world. It’s very hard to know where you’re gonna be subject to suit.

JOHN QUINN: Well, that makes things [00:29:00] kind of difficult. I mean,  if, if you don’t know where the answer may be everywhere, yeah. You know, if there isn’t some agreement, I mean, these protocols don’t all live in Delaware or Wyoming or, you know, pick your state that’s friendly or not friendly. There needs to be, we need to have some answers to these questions, don’t we?

AVICHAL GARG: That’d be nice. You know, I think  the practical reality on the ground that we see with our, with our companies and founders is that most people basically say, you know what? I don’t think this is getting resolved anytime soon. And so I just need to hedge. And so what you’ll see is really interesting structures, like not just,  sort of like where you incorporate it or do you do a Cayman structure or whatever, but like literally physically, where do you hire people?

And so what they’ll do is the founder might be based in San Francisco or New York, they might hire a couple of people here and then they might,  have a, have their primary. Office in Lisbon where they might have their primary engineering office in Argentina,  and then they’ll have a secondary office in Malaysia or Singapore, and so what they do is [00:30:00] they end up sort of hedging in this way just in case, because they’re not sure, right? So it’s like, okay, a couple years ago Singapore was really friendly, or Hong Kong is really friendly. They’re no longer, and so what I need to do is pick up, you know, pick up those people and move them somewhere else.

So it creates a lot of complexity on the business side for these founders and for these businesses to try to figure out how to navigate this. And people sort of end up hedging which is unfortunate. It’s obviously a huge cost in the business where people have to manage their businesses this way.

It’s also from, from an American,  you know, because most of the venture capital industry is still here. You know, if you look at the largest VC firms that do this stuff,  Electric and Andreessen and Paradigm, and it’s, it’s actually primarily SF based and, and almost entirely US based, like between SF and New York.

And so in a weird way, what we end up doing as investors is subsidizing technical development in these other markets because there’s lack of clarity. And so what happens is we give, you know, millions of dollars to these founders who start companies, and then those founders go hire 10 engineers in places like Berlin because that, that’s where they’re sure that the engineers won’t get, you know, yeah. Pursued by some government authority. And so,  it’s, it’s sort of a, [00:31:00] it’s a, it’s sort of like an unfortunate second order effect as we’re subsidizing technical development in other markets outside the US.

JOHN QUINN: I mean, Emily, what developments have there been in the law in terms of who can be liable? I mean, we, we, I know there’ve been,  you know, Wyoming has passed legislation about DAOs, decentralized autonomous organizations. I don’t know whether there’s any other US jurisdictions that have done that. , and we have seen some litigation about DAO liability,  members of a dao, how they can be liable, should be thought of as partnerships, unincorporated associations. Again, this tension between traditional legal concepts and these new innovative digital based organizations or entities. What is the development of the law so far in this area? 

EMILY KAPUR: It’s still very new you know, even though DAOs have been around for a while, I think the decisions that we’re seeing are still in very early stages.

You know, decisions on motions to dismiss kind of [00:32:00] stuff, stuff isn’t,  nobody’s really been held liable at the, at the end of a case yet. But there are some early decisions in the DAO space that I think have been. Concerning those who are involved with DAOs,  because there is this partnership theory that is now being used to suggest that everyone who participates in a dao, even if you’re a, you know, a relatively small token holder, you know, perhaps you weren’t participating in some vote that is an issue or, or maybe had, you know, no opportunity to stop that vote or control it. There’s this suggestion that you may nevertheless be part of a partnership,  and potentially liable for things that the DAO does. So I think there’s, you know, there’s a real tension there. 

On the one hand, you know, with DAOs, I think, courts are concerned that there is some kind of effort to structure DAOs such that, you know, the, any, any activities,  are outside [00:33:00] the ability of the court to reach. I think, you know, judges tend not to like a suggestion like that but at the same time, there’s, there’s this real,  there is this fundamental issue arising with the technology when you have a DAO that you know is distributed, where ownership is global, there is no headquarters, there is no LLC or other formal organization running the dao. Is it appropriate? For courts to come in and, and potentially hold, you know, everybody involved in that process liable for,  you know, for alleged misdeeds by the Dao. 

So there’s a few different cases in this vein mostly in California federal courts to date and we’re gonna have to see, you know, how those play out. But,  and I’m sure Avichal can weigh in. I know there’s a lot of concern in the investor community about these kinds of decisions. Because it creates potentially, you know, risk for investors who are not running projects, [00:34:00]  of being held liable, you know, just for kind of investing in the project.

AVICHAL GARG: Yeah. There are a lot of open questions here for sure. I think the liability questions around DAOs are certainly interesting. I think,  one thing I think about with this too is in general, you don’t have, like from an engineer’s perspective, this stuff is really interesting because you could play with it and experiment with it, and I don’t think it’s an accident that so much really interesting experimentation has happened outside of the government’s purview. There’s a talk that this guy, Bill Gurley, who at Benchmark,  gave maybe a year or two ago, and it was a little tongue in cheek, but it was kind of hilarious and, and there’s some truth to it, which is like part of the reason San Francisco is so successful.

Is that it’s about as far from Washington DC as you can possibly get in the United States.  and, and so, you know, the, the sort of like, we’ll, we’ll go off and do a thing and maybe it’s legal, maybe it’s illegal, we don’t quite know, but we’re gonna do it anyway, kind of mentality, I think is how [00:35:00] engineers think about this stuff, and it’s mostly from a perspective of user value.  and I do worry a little bit that we went on this weird detour. Like if you look at crypto, let’s say 2009 with Bitcoin through roughly 2018, 2019, somewhere in there, it was, it was actually very experimental and there were a lot of really, really interesting things happening.

 A lot of them, like early DAO, thought about how AI is gonna use this stuff when people were thinking about this stuff back then and, and sort of the Gensler area of the SC took us in this direction where people got really scared to experiment. And so we killed off a lot of the experimentation and hopefully it comes back now, but we don’t really have a framework in the United States to think about how to do this experimentation other than a bunch of crazy people just go do it. And maybe it’s illegal. I mean, we had to deal with this with the internet. We had to deal with this with Uber, we had to deal with Airbnb. PayPal wasn’t sure what kind of licenses they would need back in the day. eBay and Amazon weren’t sure what the tax regime was gonna be for e-commerce. Like there were, there were, there were these questions, we just forget them, [00:36:00] right? Because now they’re so normal for us to just buy things on Amazon or use PayPal, which we’ve forgotten 25 years ago we were thinking through a lot of these issues too.

And a bunch of entrepreneurs just said, yeah, maybe it’s illegal, but I’ll do it anyway, because it’s good for the consumer and generally we tend to err on the side of being, you know, if it’s good for the consumer or the government, let it through. But yeah, it is, it is something I worry about a little bit.

It’s like a lot of these ideas are really interesting ideas, and I worry a little bit that we’ve cut them off because the regulars got a little too, too ambitious. I think. I think we may have cut off some of that experimentation. I’m hoping some of it starts to come back. 

JOHN QUINN: Yeah. I mean the regulatory environment and the attitude in Washington certainly has to change enormously.

So, I mean, hopefully that’s right. I mean, we were involved in representing Uber when they rolled out from San Francisco and Travis Kalanick told us, I’m gonna get sued in every city. Yeah. You know, there’s gonna be a limousine and taxi commissions, there’s gonna be unions. We’ll get challenged everywhere.

 And [00:37:00] they did. I mean, but the service was so popular that when there was a challenge, they could, with a press of a button. Get, you know, thousands of consumers to bombard the taxi commission with emails like saying, we love our Uber. Don’t take our Uber away. 

AVICHAL GARG: Yeah. 

JOHN QUINN: So maybe there’s something to the idea that if your service really is popular, the policymakers, the lawmakers will get the message.

Maybe that’s a little bit what we’ve seen in the enactment of the Genius Act. Yeah. But to, but to go back to this, you know, liability question. You know, there was a concept that was floated a few years ago about code is law. You know, like if the code permits it, it’s legal. So if the code permitted you to in effect, you know, take some cryptocurrencies if you, if you,  if you could do that, if, if a hack wasn’t really a hack, if it was permitted by the protocol. 

And I think there’ve been a couple of decisions, Emily, that have addressed that haven’t [00:38:00] there, about whether code is law or whether more traditional concepts of liability might apply,  that just ’cause the protocol permits. It isn’t the end of the legal inquiry. 

EMILY KAPUR: Well, I think the most interesting recent development in this area is the Roman Storm’s trial which got at this question a number of questions.  The prosecutors came after Roman Storm,  for part of what he characterized as just writing the code for tornado cash and putting it out there.  Tornado Cash is a mixer service that makes it easier to keep transactions on the blockchain private,  and it was used for many legitimate purposes and is also used for some criminal purposes. And the case has been, has gotten a lot of attention and been really interesting because,  Roman Storm’s defense team effectively argued, [00:39:00] you know, that the prosecutors are coming after him because he wrote some code and sent it out into the world and, you know, he, he has no control over it. 

And, you know, it’s how it’s used, but are you gonna hold him liable forever just because he wrote some code and there were a lot of questions raised about, you know, is, is code speech and, and in a sense, you know, is it, is it law? Is it, can it really be illegal to just write code to the prosecution?

I think understanding those kinds of arguments really undermine their case. They really tried to pivot and they said this, it’s not about those questions. This is about, you know, did he continue to control the protocol in various ways through, you know, issuing and maintaining the user interface?

Did he know exactly how this mixer service was being used? You know, perhaps that’s enough and the jury just came back with their verdict on, on August 6th. Then it was mixed. [00:40:00]  so they, you know, they convicted him on the lesser offense,  but not on the more serious offenses. And I think, you know, it’s a reflection of the jury understanding these tensions,  in some respects and, you know, and understanding that, on the one hand, you know, you can say that you sent it out into the world and had no continuing involvement. But if the prosecutors can make a case that there was continuing involvement, there was knowledge, you know, maybe there’s something there. But, but at the same time, you know, we’re not gonna hold a developer liable kind of in perpetuity,  you know, with a, with a 20 year maximum sentence for, you know, at the, at the end of the day writing code. And of course, you know, there’s gonna be appeals, but,  but I think it’s, it’s been a closely watched trial and, and a really interesting decision,  that gets at some of these core issues that are arising.

JOHN QUINN: Aha. When we spoke before you brought up the really kind of fascinating [00:41:00] idea that, you know, we are, we’re in a situation now or approaching a situation where we have our counterparty as an autonomous agent. , and, and how do we think about that sort of the intersection between crypto and ai? I mean, do we need new legal concepts or a concept of different types of legal entity to account for an agent which is acting in the, in the crypto world autonomously, can such a, can such an agent be liable? What happens when the agent commits fraud? If that makes any sense at all. Yeah. 

AVICHAL GARG: Yeah. These are all really interesting questions and they do dovetail with some of these privacy questions too.

You know, I think on the privacy stuff, we haven’t had to really grapple with this stuff for 30 years. It was in the Early, mid nineties. Um. You had,  sort of the, the Bernstein V. DOJ case, and, well, you probably know that the date better [00:42:00] than I, but it’s an interesting thought experiment, which I think we now actually is more than a thought experiment with Roman Storm, which is, you know, the thing we always used to talk about kinda in the, in the computer science and cryptography communities was, well, what if that case, which, you know, for, for people who may not be aware, there’s sort of this case in the nineties, you know, cryptography used to be a regulated munition.

So the government said you can’t export strong cryptography. This grad student,  I think his name was David Bernstein at Berkeley, was getting a PhD, said, wait a second, this doesn’t make any sense. All I’m doing is writing down symbols on a piece of paper. These are mathematical symbols. They’re not, you know,  written language, but they’re math symbols, and then the government has to approve whether or not I can publish my paper. That doesn’t make any sense. This is a free speech issue. Like I should be able to write down any symbol I want on a piece of paper and, and put it out in the public domain, anyone. And they said, yeah, a code is a form of free speech, I can’t restrict you from writing symbols down. That doesn’t make any sense.  

But it’s an interesting thought experiment that we’re now living through, which is what we’ve now, since we’ve lived through 9/11. And we [00:43:00] have lifted the Patriot Act, and so people’s norms around what isn’t, isn’t acceptable, may have evolved over the last 30 years, and so, you know, I think the privacy stuff kind of bumps up against that. And I think kind of John, what you’re getting at, which is this idea of how do we think about the counterparty to a transaction being a computer, being a piece of code. Because what these, what these cryptographic systems, what you do is it, it lets a computer own money, right?

The, the, the money that’s sitting in a smart contract is sitting in a wallet. The wallet is not sitting in a bank account. It is not owned by humans. It’s not owned by a corporation. It’s owned by that piece of code on that blockchain and that code,  that owns, you know, the, the, the keys that give you access to that,  to that wallet, they have the right to move that money, they don’t really live in a single jurisdiction and that, that piece of code could pay a human to do a thing or could pay another. Computer to do a thing, to process some information but we don’t really have a concept for what that thing is, right? A smart contract is not a legal entity. It’s not a, it’s not an LLC, it’s not a C Corp, it’s not a [00:44:00] human, and opens up some really challenging questions, for example, around, well, you know, in which jurisdictions does that thing exist? What do we think about that? Or kinda what you’re getting at is like, well, how does, how do notions of even KYC work here? What is that thing and how do we, how do we interface with it?

I don’t think we have great answers to that. You know, it may be that the simple answer is that you wrap it in something that we’re kind of familiar with. So people in Wyoming are playing with some of this stuff that I’m sure can speak to much better than I,  sort of new rappers for these kinds of entities, but even that, it’s quite challenging, I think because it’s not that we need those wraps, right? Like the entities that exist on chain can be your counterparties to transactions, whether or not there is a legal wrapper for it, which is kind of a bizarre thought.  

So I think if, if somebody were to sit down,  you know, who actually understands the history of these things and the law and how, how to sort of write policy, I think there is some sort of like seminal piece of legislation here, even bigger than stablecoins, [00:45:00] which essentially says, what are these new entities? What are these new AI agents that you can wire up to a smart contract that you can have a conversation with and that can own money and can pay you and you can pay them and they can pay other agents and they can pay other humans. What do we think about that and what rules apply to them?

And it’s very reminiscent of what was happening in the 1850s around limited liability conversations, right? It’s just like, what is a corporation? And we, we sort of like jokingly, people talk about this tongue, tongue in cheek, like the Mitt Romney thing, like corporations are people too, but in some sense they’re right.

They don’t have all of the rights of people, but they have some of the rights of people and they have different rules in certain other cases. And I think there’s an opportunity for somebody to sit down and really think through like how does that work with these AI systems? And how does that work when the AI can own money?

These cryptographic systems because they can effectively own dollars now, right? They can own these cryptographic dollars.  and so what does, what does that mean?  and, and what are the rules that apply to those things? And I actually think if you created some clarity around that,  you might actually encourage those entities to essentially domicile in the US for all intents and [00:46:00] purposes, and to say, I want to affiliate with this sort of regulatory regime.

And that will be my interface to the real world.  I think it’d be really good,  because it would actually give the US jurisdiction and oversight and so on, but somebody much, much smarter than I, who actually understands all these issues, needs to sit down and think about what those are. But I think there’s, there’s like some really fundamental issues here, because right now what you have is a bunch of code and I can just interact with the code and I don’t, I don’t even know what the government thinks of those things, right?

Like they sort of don’t exist. They sort of like it bizarrely they’re on grid. ’cause they’re, they’re only digital, but from a legal government perspective, they’re effectively off grid. Right? There’s no social security number. There’s no TIN, there’s no bank account, there’s no physical embodiment that you could even go after to punish if you wanna do something. Like what are these things we don’t really have a good answer for. 

JOHN QUINN: Yeah. But it’s, as you say, that the thought process is strange, but no stranger than, I’m sure the reaction to the idea that, well, we’re gonna have these entities,  corporations or limited liability companies Yeah. Which are fictitious, but they’re gonna have legal [00:47:00] rights.

Yeah. You know, we now know they have rights to donate to political campaigns. Yeah. Perfect example. So in the day, in the back, in the day, that. That would be really strange to contemplate. Yeah. But we’re all used to that now. We all accept that. 

AVICHAL GARG: Yeah. 

JOHN QUINN: We need some new ways of thinking about these new entities, whatever we’ll call ’em.

Emily, are you aware of any thoughts from the legal world or legislation or regulatory world about how to address these questions about autonomous agents and dealing with,  essentially counterparties that are not human beings but are computers? 

EMILY KAPUR: I mean, I think Avichal is right that it’s gonna take a lot of creativity.

I think that, you know, the Wyoming approach kind of sets,  sets up an LLC like structure that’s available for DAOs. But, I think a lot of projects don’t want that in many respects. You know, they, they actually aren’t. Interested in, I mean, they, you know, obviously you could, you could set up an LLC, [00:48:00]  and have your, your crypto project go through that.

But I think, in many respects, the engineering project of it all is more creative than that.  but, there’s a fundamental tension that has to be resolved. Of course, you know, if you, there needs to be a way such that, you know, if these organizations, entities,  commit acts that, you know, for which somebody needs to be held viable, there needs to be a way for victims to recover.

And I think we haven’t figured that out, you know, we haven’t figured out how you can bridge that gap between, between needing a way to, to compensate victims who are harmed,  if there is, you know, fraud or other, or other bad acts,  while also allowing for this creativity and organizational structure, such that, you know, we have something that, that isn’t just an LLC, but is is something fundamentally different that that does live on the blockchain. 

AVICHAL GARG: Just building on that too, I mean this, this, this really comes to a head and really to bring it back to some of the geopolitics stuff we were [00:49:00] talking about earlier.

This gets really crazy when you think about, well let’s say a foreign adversary is creating bots and putting them up on Twitter and you know, it’s an LLM behind it and the LLMs have gotten really good, it sounds basically just like a human. So it’s tweeting out stuff to shift public perception. Maybe at scale, maybe there’s, there’s, you know, 10,000 such bots, but these bots also, because a lot of people do this internationally, they look like software engineers. And so they have, you know, some cryptographic wallet address and you can hire the bot to do some work.  and, you know, write some code and, and it’ll send you back the code to run your website or whatever.

And then you pay some US dollars to, you know, a crypto wallet, which doesn’t seem weird. Like if, if you’ve worked with engineers in Argentina or something, you might chat with ’em on email and they send you the code that they’re supposed to send and, you know, to check it’s checked to GitHub and you get, you know, you pay them for it.

And then that money is now being sent to, you know, this bot which has been buying API time to make its, you know, own model better.  tweet because, you know, Twitter may have some API limits, but now it can buy more API time [00:50:00] so it can tweet more.  like what does that thing, right, and how do we think about that?

Like, does Twitter have an obligation to prove that everybody on the site is human? Like, do we need some sort of proof of humanity to prove that you’re a human, that is somehow, I don’t know, tied to your biology or something, and, and, and you can only have, you know, access to certain services if you prove you’re human?

I don’t know. I don’t know how that works. There’s both like the legal questions here, but there’s some like really gnarly technical questions of like, well, how do you know instead, bot intent.

JOHN QUINN: Well, in a lot of ways these legal questions are no different than a whole host of legal issues that are being thrown up. I mean we, we now have cases being filed for defamation because the output of an LLM is alleged to be defamatory. And how do we, how do we think about what that, you know, defamation is, who’s the speaker?

First off, defamation. Traditionally, you need a speaker who’s the speaker [00:51:00] who’s liable. Defamation is an intentional tort. You can’t negligently defame somebody whose intention is at issue if the output of an LLM. Is quote unquote defamatory. It simply doesn’t fit in the traditional legal principles.

We have the same issue. Everybody knows about the question about use of copyrighted material as training, you know, training sets. We’re gonna have an answer to that. Courts are starting to make decisions, you know, you can’t patent the inventions made by AI. AI is inventing all kinds of things, molecules, industrial processes and the like, but if a human doesn’t substantially contribute to the invention, you can’t patent it. And, I submit that that may render patent law ultimately utterly irrelevant because we know patent AI is inventing all kinds of things. So. I think if we, these issues are all being teed up in courts. 

If we don’t have legislation, if we [00:52:00] don’t have regulation, these issues are gonna be presented to courts, and courts are gonna decide them, they’re gonna make exercise their best judgment, and we’ll have some decisions and it’ll be the way so much laws developed in the common law world.

Courts make decisions. There are presidents, some courts follow them, other courts may not follow them,  and the like, I mean, that’s sort of how I see this evolving if we don’t get something from the legislatures. 

EMILY KAPUR: I think that’s exactly right. And, and the way that crypto law has developed, I think may, may foreshadow that.

And,  you know, there’ll be areas where courts are gonna be able to use their judgment and creativity and, and find ways through that maybe don’t need to be adjusted through the legislative process.  and there will be areas where. Now, the courts make decisions based on existing statutes that the public in general just doesn’t like, you know, that it’s, it’s at odds with what the industry needs with the development of the technology, and, hopefully we’ll see some legislative fixes [00:53:00] there. 

And then there will be other areas like these questions of, you know, who do you hold liable when you have these creative technical structures that it may be that it takes us a really long time to figure out what the right answer is. You know, it’s hard, it’s hard to write legislation when nobody can quite agree on what the right answer is in the first place, but, hopefully we start to figure that out in the crypto space and, and eventually in the AI space. 

AVICHAL GARG: Yeah. The last point I think is a really interesting one too, which is a lot of this stuff is a little in the sky and it’s a little theoretical right now. And one thing I wish, you know, the United States we’re better at is this notion of either like sandboxes or safe harbors where we sort of say, you know what, we kind of don’t know the answer yet. Here’s like five years, you guys go do whatever. We’re not gonna put you in jail for, for trying a bunch of stuff.  just tell us what you’re doing and, and on the other side, then we’ll have enough data to know what the heck to do because we kind of don’t know the answer yet.

And then letting a bunch of engineers have free reign for five years and just go play with it, with, you [00:54:00] know, limited consequence. Just let us know what you’re doing so we know we’re not doing something totally terrible. Um. I wish we were doing more stuff like that and the SEC is sort of moving in that direction.

I think Paul Atkins coming in and,  Mr. Pierce has, has always been really great about this, but I think that’s a real opportunity. Like China does a great job of this with special economic zones and stuff where they really incentivize behaviors to come in. And you can see if you look at Shenzhen, you know how effective that can be, but I think there’s actually an opportunity, like while the legislators all try to figure this out for the regulators, right? The SECs and the CFTC of the world,  or the FTC or the FDA and these other domains to go out and say, hey, we kind of don’t know the answer to these new technologies, can, can you guys just come in and play with it for five years and we’ll figure it out in five years?

But, in that intervening time, we need like max experimentation and instead of being afraid of experimentation, let’s lean into it. 

JOHN QUINN: Right. They, you know, in the US the traditional answer to that has been,  the states. Yeah. Which Benjamin Franklin called the laboratories of democracy. Yeah, that’s a great point.

And we’ve seen that, we’ve seen that in AI. We have [00:55:00] some states where, you know, if you wanna use an AI tool in making employment decisions, you’ve got to certify that your data set is unbiased, whatever that means. Yeah, or self-driving cars are like this, right. States are taking very different approaches.

So you have different states, different approaches, I think we had a, you know, there was an effort as you know, to get legislation through Washington that would’ve preempted all states experimentation, and I, from my opinion, think it is fortunate that that didn’t pass. So we’re gonna still see different approaches moving forward in the states, but all this is fascinating.

We touched on a lot, there’s a lot more that we could talk about here, but I think this has been a fascinating conversation. I like the way you put this in the notes that you sent me for this conversation. Will the law domesticate crypto, or will crypto force legal innovation? And I think that puts it very well, and that’s, that’s the [00:56:00] nub of the question that we’ve been talking about here. So thank you very much for joining us. We’ve been speaking with Avichal Garg who is the managing partner of Electric Capital and the chairman of the Crypto Council for Innovation and Emily Kaur, who’s one of my partners at Quinn Emanuel in our Silicon Valley office.

This is John Quinn, and this has been Law, disrupted.

Thank you for listening to Law, disrupted with me, John Quinn. If you enjoyed the show, please subscribe and leave a rating and review on your chosen podcast app. To stay up to date with the latest episodes, you can sign up for email alerts at our website, Law-disrupted.com, or follow me on X at JBQ Law or at Quinn Emanuel.

Thank you for tuning [00:57:00] in.

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Published: Sep 10 2025