The following transcript is taken from The Scoop, The Block's new podcast. Listen below and subscribe to The Scoop on Apple, Spotify, Google Play, Stitcher, or wherever you listen to podcasts. Email feedback to [email protected]. This transcript has been edited for clarity and length.
Frank Chaparro and Ryan Todd speak to Kristin Smith, the Director of External Affairs at the Blockchain Association in this week's episode of The Scoop. Frank, Ryan, and Kristin discuss the implications of the case against Kik as well as the recently reintroduced Token Taxonomy Act. Kristin also reveals what it's like to represent leading crypto companies on Capitol Hill, and the reception of crypto and blockchain in Washington, D.C.
Frank Chapparro Hi guys My name is Frank Chapparro senior correspondent at The Block. You might know me as Frankie scoops or fintech Frank but hopefully now you'll get to know me as the host of the bloc's new podcast called The Scoop made especially for decision makers and thrill seekers in the crypto market. Each week I along with one of my cohorts here at the block will talk with CEOs innovators and builders across the crypto market. The blockchain Association has an interesting seat in the cryptocurrency and blockchain market representing the interests of firms like Coinbase and and to Washington's congressmen and powerful elite leading the charge there is Kristen Smith a veteran of the Hill who has seen both sides of lobbying working for different Congresspeople and trade firms. She joined the scoop to talk about what her members want from Congress. The organization's flagship token taxonomy Act which defines which tokens should fall under securities laws and the breaking news of the S.E.C. suing kick the company which raised one hundred million dollars in an ICOs in 2017. I'd like to take a minute to thank our sponsor Kashyap Kashyap has been the number one finance app in the App Store for almost two years. It was also the first major peer to peer payments app to start supporting bitcoin and it's still the fastest and easiest way to onramp VR. No more waiting five days for your ICOs payments to come through with cash app you can buy Bitcoin instantly. It's also a favorite of the block. Analyst Steven Zang he used his cash app when he goes to Chipotle and gets money back he saves every time he eats a burrito that keeps Stephen happy that keeps the block happy and that keeps the crypto world informed with the best news and research in the entire market. You can also use it at lift whole foods Chipotle. As I said Chick fil A Starbucks and Dunkin Donuts download cash app today from the App Store or Google Play. I hope you enjoy the episode. Ladies and gentlemen thank you so much for tuning in to the scoop. The Block's podcast for crypto thrill seekers and decision makers today we have a very special guest right off the Amtrak from Washington D.C. Kristen Smith. She is the external affairs director of the blockchain Association and we have back from vacation. Our very special colleague on our research team Ryan Todd. He's back from Alaska. He's ready to dive into things we are going to be exploring all things regulations this thing called the token taxonomy act. Why it's good for crypto. Why Christine is on the Hill beating on doors trying to get congressmen and congresswomen to jump on board with this thing and we're going to be looking at some breaking news today. We have some breaking news out of kick the kick FCC saga. We've got a very interesting 49 page lawsuit that the FCC issued against kick the social media platform and we are going to be looking at you know the other hurdles that are facing the members that pay Kristin and her entity to support them and support the initiatives that they are looking to get signed into law or otherwise. Thanks so much for joining us.
Kristin Smith Thank you Frank and thanks Ryan. It's great to be here.
Frank Chapparro Yeah. So I guess the best place to start is you know what. What exactly. You know when you're explaining what you do to folks how do you how do you do that. What's your elevator pitch to them.
Kristin Smith Well it depends on if I'm talking to Congress or if I'm talking to the industry with the industry. I let them know that we're....
Frank Chapparro You were you were hanging out with your niece this weekend how would you describe it to her?
Kristin Smith I don't think I can describe it to my 6 year old niece.
Frank Chapparro How would you describe it to the industry.
Kristin Smith You know the industry let him know that we're a trade association and that we represent crypto companies before policymakers whether it be Congress or regulators there. I think there's a lot we were talking about this a little bit before the show. There was a lot of confusion out there. I think from folks that are are working and developing and creating and at the heart of the industry is that there are a lot of different organizations that have sprung up in recent years to sort of help with some of these various issues. And I think what's complicating is that they all have very distinct and separate roles. But our role at the blockchain Association is to work on federal U.S. policy to change it and make it better specifically for the crypto industry.
Frank Chapparro And your members essentially pay you on a monthly annual basis to not do their bidding has a negative connotation but but to lobby.
Kristin Smith Right, to lobby
Frank Chapparro So how talked about Amendment. How do they how how many are there and in what industries of crypto. Yeah. Where do they come from.
Kristin Smith So we have 19 member companies. So we have exchanges we have projects and then we have investors and.
Frank Chapparro Who are some of the big names?
Kristin Smith Coinbase circle crack in Interstellar protocol labs. Now the company formerly known as ze cash I'm not not up to date on there. They're branding it digital currency group polishing capital. Union Square Ventures. Organizations like that.
Ryan Todd Heavy hitting list.
Frank Chapparro What do you think. Is the biggest thing on their mind right now. You know when they're when they're reaching out to you about the the impediments the regulatory impediments that they face to operate their business. What is it and how are you guys trying to ameliorate that.
Kristin Smith Yeah. So the number one issue that our members care about is getting not just clarity but the appropriate clarity from regulators as to when these token transactions need to comply with securities laws and when they don't. I think that's top of mind whether it's a project to raise money under a soft and wants to ultimately deliver those tokens or an exchange that is deciding what to list or investors who are supporting this son on the front end that that is the number one question on the minds of my members.
Frank Chapparro And I imagine when you talk about the token taxonomy act that's playing a part in addressing that. What exactly does it outline in terms of defining what is and what is it because that's a question right that I feel like everyone wants an answer to. If I'm doing a token sale from issuing a token how do I know when it's a security when it's a utility token J. Chairman of the FCC. I feel like he's been pretty clear in saying that basically you just look at the...
Ryan Todd Following the regulation that's been around since the 30's.
Frank Chapparro And you know I guess is your point that the how we test isn't enough it's not good enough. We need something new.
Kristin Smith Yeah. Well I think we agree with what the spirit of the we test is and that you know if you take a step back and think about why we have securities laws to begin with the one in the number probably the top concern is bridging the information asymmetry between an investor who wants to invest in a given type of security and the issuer of that security. And that's really I think important role and it was top of mind back in the 30s when these laws came about. So people had good information to make informed investment decisions. And what you know we have today is that this how we test it gives us this definition of an investment contract which is a security and it's it's a facts and circumstances analysis. So you have to look at it on a case by case basis. Now that we're in this world of crypto people sort of dusted off this case that really I think mostly just law students looked at and it's become sort of front and center. And so I guess if you look at a very high level how do we get sort of this this clarity you know trying to pigeonhole it within the 73 year old Supreme Court test is you know not the ideal way for folks. And we've seen them when we've seen just you know a couple weeks ago with Circle's announcement but there's numerous projects out there that are you know distancing themselves from the United States. They're they're not giving people within our borders the same access to certain tokens investors are you know encouraging projects to be developed overseas and so we want to find a way to have clarity so people know you know once they get past that point of no longer controlling a project how do you know for sure that you've met the requirements needed to be under a separate regulatory regime. And so we just think that the how he tests going back to your original question isn't it doesn't really facilitate that process it's very lawyer intensive and we would like a process that's easier to understand so that developers and innovators can do their thing without having to engage white shoe law firms to help them navigate the process.
Frank Chapparro This is the second rendition of this bill that was read that was reintroduced.
Kristin Smith Yes.
Frank Chapparro What what changes did you guys make on that and was that the result of you know different lawmakers reaching out saying this doesn't make sense or regulars make reaching out saying that this doesn't make sense or just make it a stronger bill. How did that sort of...
Ryan Todd Did you work with regulators to form this this bill or process completely flush out.
Kristin Smith Yes. So the token taxonomy Act was originally introduced in December and it was reintroduced again in April. And there were some changes made to it. There were also some additional supporters that were involved in in the new version of the bill and we worked very closely with the offices Warren Davidson and Darren Soto as they were crafting this bill throughout the fall. I think one of the things that is really great about the legislative process. Opposed to the kick case which we want to get into. Or in some cases even the regulatory process is that the legislative process is a very open and accessible process that is easy to be a part of. You just sort of have to know how to engage with lawmakers. But you know there are very very few people who want to be able to just call up their congressmen and go talk to them about an issue. You don't need any special fancy lobbyist to do that any any project any company can go walk in and meet with Congress. And the first version that was introduced we thought was pretty good. We we know that the legislation does a couple of things. The part that we care the most about that we contributed the most to was coming up with a definition of what we ultimately called a digital token and have that excluded from the definition of a security. It's probably by no means perfect but it's a place to start. And there might even be a better way to construct this idea and this concept and we you know are always open to talking about how to better do this. But that's sort of the beauty of the legislative process as you get to throw ideas out and debate them and improve them. The bill also deals with the Investment Advisors Act and some custody type provisions and then it also has some tax policy provisions and they're both a de minimus exemption so that you don't have to pay capital gains if you buy a cup of coffee with bitcoin and also a like kind exchange. The the it's sort of a wish list of things that the folks in the ecosystem would want. And in the bill that was introduced in April in addition to getting a broader set of co-sponsors there was some state preemption language that was included and some sort of technical changes but nothing too substantial on sort of our core issue of what is a digital tokenized. But you know I know from talking with the offices that are working on this bill they're very open to ideas on how to improve it and also are working to to expand the group of supporters that support the bill.
Frank Chapparro It probably. Probably makes sense to tackle everything at once right. I'm thinking you know why not go after something small that can make a big difference like the capital gains exemption which makes a lot of sense right. If you're gonna be using this as money it doesn't make sense to you no tax in the same way as as you know equity that you trade. Why not start small and then maybe you work yourself up to you know completely overhauling you know 80 plus year old securities laws.
Kristin Smith Yeah well I think the issue the tax issues versus the securities issues are a little bit different. I mean we do have some guidance on the tax side and there are some open questions that are out there and the IRS is looking to issue additional guidance. We have this de minimus issue and this like kind exchange issue. Those aren't as immediately as pressing as dealing with the S.E.C. right. Because if you get it wrong with the S.E.C. it's It's strict liability. It's very bad. You don't want to have to go through that process. The S.E.C. is definitely sort of the more immediate I don't say threat but definitely like a concern to the industry that they don't want to get in the crosshairs with regulators and so that just has you know the S.E.C. is like at the door. And so that that's something that I think our members want to try to get that issue resolved first. A lot of the issues you know dealing with like a de minimis exemption and others really the onus there is on sort of individuals who use crypto. So I think it would be useful to get some of these things for for the greater good of the ecosystem but it's not that same level of threat. That being said the you know looking at the legislation the the way Congress is structured is it's a committee system and there are different committees of jurisdiction that have different expertise and you know the token taxonomy act touches on a couple of these different committees and so you know as it moves forward it's very likely that it could get broken off or added to something else as an amendment. And we'll see only pieces of that move. But you know right now if you're a member of Congress and you have constituents that use crypto or you have companies in your district that are employing people in crypto if you want to show your support if you want to take a step to make the US be more competitive in the space you can sign on one bill as sort of a one stop shop. But ultimately it'll probably get broken up into pieces.
Ryan Todd Has there been any pushback or comments from D.C. people who you talk to on a regular basis on splitting those two prongs out from the the tax component and the securities component.
Kristin Smith Yeah. We've talked about it the you know one a quick way to kill a bill is to have it need to go through multiple different committees and we were fully aware of that at the time that that it was getting introduced. But you know in my my discussions with folks on the hill we thought it made sense to have sort of everything under one umbrella at this stage and its legislative process. Is it a little bit of a zigzag. I mean you know to get a bill signed into law it has to be voted on in the house. It has to be voted on in the Senate in identical form and it has to be signed by the president.
Frank Chapparro And so where is it right now. It's in committees.
Kristin Smith It's at the committee level.
Frank Chapparro Which committee is reviewing it?
Kristin Smith When a bill is introduced its so its primary jurisdiction is the House Financial Services Committee which is chaired by Maxine Waters from California and the subcommittee of jurisdiction is the investor protection and capital markets subcommittee which is Carolyn Maloney here in New York. But it also has Ways and Means committee jurisdiction which is the committee that does tax policy and then it wasn't referred to this committee but it could very well touch or need to touch ultimately the House Agriculture Committee because House Agriculture Committee has jurisdiction over the CFTC or potentially the House Energy and Commerce Committee because they have jurisdiction over that Federal Trade Commission which could also play a role in this. So having to go through four committees is not not fun. So if we can break it apart into pieces that would be much.
Frank Chapparro So where is it at. I mean I guess it's going to be at different levels that each one of those committees is it farther along further along in one of those committees.
Kristin Smith No no. So right now it's just sitting in the House Financial Services Committee and you know when bills are...
Frank Chapparro How long could that be in there?
Kristin Smith Could be forever. It's not gonna be forever if we do our job right.
Ryan Todd What's the realistic assumption of success timeline wise.
Frank Chapparro Just pull up that you know that old cartoon what's it if you want to be a bill.
Kristin Smith Yeah I'm just a bill on Capitol Hill. It's yeah it's a little little a little more complicated then that song but it ultimately needs just to sort of follow some of the key key parts of that with that song covers. But I know when a bill is introduced it is always referred to a committee as sort of a automatic matter and then you know the committee itself is divided into subcommittees and so you know the entire committee process in theory could be bypassed if the leadership of the House or the Senate wants to sort of fast track something there's processes for doing that. But the the typically an especially something of this nature which is pretty technical. Most of the work is going to be done in the committee process. So right now it's at a point where we're working to build support from additional members of the committee by getting them to sign on as co-sponsors. We're also looking to get legislation introduced in the Senate. The Senate is quite a bit further behind in the education process than the house but we're working to...
Ryan Todd Is there a reason for that or...
Kristin Smith I think it's just because they're older.
Frank Chapparro It's harder to get them I'd imagine.
Kristin Smith Yeah there is. There's kind of a saying that you know if the House is sort of the tea cup and the the Senate is like the saucer that cools the tea cup so you know the House members are elected every two years they tend there's a lot more of them. They tend to kind of try to find these little niche issues and be you know a little bit quicker to respond. And the Senate is you know that's where the debate happens or they're a little bit more sort of thoughtful and you know there's less of them. And yeah. This happens across all.
Frank Chapparro How do you go about convincing these people to support this bill is it just fancy dinners is it calling their offices.
Kristin Smith I wish I could take them out to family dinners. You can't do that anymore.
Frank Chapparro What does it involve?
Kristin Smith It involves a lot of conversations and a lot of education. So before you can get into the details of the how we test and why we think you know open blockchain projects don't have the same information asymmetry is another project.
Frank Chapparro You probably start with what what's Bitcoin.
Kristin Smith Yeah well or Yeah. What's what's blockchain and what's the difference between an open blockchain network and a permission blockchain network because they hear you know it's a I was a staffer on the Hill for for 10 years and you know you sort of take meetings all day from people and you learn about the world by doing meetings with lobbyists and constituents and other people who are trying to get something done. And so there's you know they hear from a lot of folks that are doing sort of permission type things but you know understanding that it's not just about this ledger but it's about the fact that you can have a whole bunch of different people that are interacting and one has sort of one unit without having anybody be in charge of that. That's a different concept.
Ryan Todd What's been the biggest pushback. Maybe it's a specific item within the bill so far that you've heard.
Kristin Smith Well there are a lot of there are a couple vocal opponents to the state preemption language and you know that is something I don't see sticking in the bill forever. There are some lawyers that have had you know lawyers they have like lots of opinions on things. They have had some concerns..
Ryan Todd The crypto Twitter armchair lawyers I'm sure.
Kristin Smith Yes that have concerns about you know the definition and that maybe it's too tied to a technology or what do you do if a digital token is part of an investment contract and you know oh my goodness you're going to have to litigate a whole new set of definitions and you know I my answer to them is we want to make this as strong as possible. Please send me your ideas and your thoughts and precise language changes because you know are our industry we're very adamant that we need to have change happen but we're not wedded to the specific words and we want to improve it. And but we did put quite a bit of effort in on the front end to get to where we are at today.
Ryan Todd For the state preemptive issue. Is there precedent for that not existing for a bill I guess there's no bill so...
Kristin Smith I've worked you know not none in the crypto context but on other issues battling the states is hard. It's their politically savvy you know the governors know the congressmen and know the senators and they have an incredible infrastructure for influencing federal governments and in Washington. And so it's you know that it can be challenging. That being said it would be a shame. To go through this whole process to the point where we finally got a world where these you know sort of functional tokens that are in these decentralized networks there's a very clear checklists to get people to where they want to be and then have different states pop up with their own sort of securities laws where you know there's now this patchwork that has to be dealt with. So I do think if it's a provision...
Frank Chapparro It's like it's kind of like you know it's a really interesting point I think because that's my opinion on that is you know ther