#185 - When Circle must freeze USDC (and when they probably should) with Austin Campbell

[MUSIC PLAYING] Today, we cover one of the most interesting questions stablecoin issuers face, when to freeze their stablecoins like USDC. Now, when I saw the conversation between developers and lawyers on X, I saw a big disconnect between what the lawyers know to be true and what the devs thought was morally right. And honestly, both sides have a point. Devs want circle to freeze USDC in instances like the Drift exploit, which we'll talk about in this podcast, whereas lawyers understand why circle is freezing USDC in cases involving court orders. In this episode, we're going to talk about why that disconnect exists, what the legal obligation is for circle, what their terms of service say in terms of how they decide when to freeze assets like USDC, as well as how this implicates DeFi, given this connection with real-world assets. Welcome to Lovco, the podcast for anyone who wants to understand the legal layer of emerging technology. I'm your host, Jacob Robinson. Joining me to discuss this is Austin Campbell. Austin is the founder and managing partner of Zero Knowledge Consulting. He's also an adjunct professor at Columbia Business School. And if that's not enough credentials for you, he also worked at JP Morgan, City, and Paxos. It's a focus conversation around freezing stablecoins. I think you'll really enjoy this podcast. And if you do, you might enjoy the Lovco newsletter, which I'm launching this week. It's a free newsletter that link is in the show notes below. You get one email per week every Monday that just has one podcast, one article that involves emerging tech and law that I think you'll really enjoy. Maybe one meme and one job posting that you might be interested in. You can find the link in the show notes below. Anything mentioned in this episode by Jacob Robinson or his guest is not legal advice or investment advice. All opinions are Jacobs and his guests alone. Nothing discussed today should be relied upon for legal or investment decisions. This show is solely for information and entertainment purposes only. Jacob and his guests are not your lawyers. Nor are they investment advisors. Please work directly with a lawyer or investment professional. All right, Austin, I want to talk about what happened in March, 2026. There were 16 wallets frozen relating to a civil action. It was flagged by Zach XBT on Twitter. He spoke to one of the companies that was directly affected. They told him it was an ongoing US civil suit. The details haven't been disclosed. The businesses included exchanges, casinos, forex platform, all businesses that were operational. And so this made waves in the crypto community. Yeah, I think this is probably the first time that crypto having built things that are for lack of a better way to put it deeply incompatible with real world legal norms is starting to come to the fore and is becoming something that people are just going to need to grapple with in ways that they have avoided up until now. Because if you look at what happens, there is as you pointed out a sealed court case that I'm going to remind people court cases are presumptively public in the United States. So if something is sealed, usually there's a very narrow set of reasons that are typically like privacy interests of individuals, typically miners or like victims of certain types of crime, potentially protection of trade secrets or proprietary business information. Though that seems like a stretch here. And then the big ones where you usually run into them are national security or classified information or ongoing investigations with law enforcement. And that becomes suggestive with some of the actions that we actually saw. Because if you freeze a commingled exchange account, that's not a trivial thing. But I'm also reminding people that did not happen accidentally. Some court looked at that evidence and said, "Yeah, go ahead." And that tells me like again, if we're thinking of the realm of hypotheticals, all people or at least all US companies have, for instance, sanctions obligations. And as somebody who is at a bank at a risk roll at one point, if you have an OFAC sanctions problem, you were supposed to take those funds, segregate them, and hold them aside until basically a court or the US government tells you what to do with them. And in finance, the whole reason for like this hatred of undifferentiated omnilegers comes from the fact that you have all these sorts of legal requirements. And so when you built a commingled exchange account where you may have funds with one of those many concerns in them, and no way to individually segregate those funds, a federal judge is not going to be like, those clever crypto developers got us, I guess we can't do anything. They're going to be like, no, just freeze the whole thing and sort it out. - The way bank freezes work, the banks freeze the contractual right to withdraw. They don't physically segregate the cash in, say, the case of an ATM. - And I'm going to take it one step further. The person who deposited does not even own the cash anymore. Like this is a very important sort of like, let's stop with pure theoretics and talk about actual physical mechanics. When you deposit cash into an ATM, you are no longer the owner of that cash. The bank owns the cash. The actual legal structure of that transaction is the bank buys, I don't know, $100 of cash from you if that's what you deposited and gives you $100 of bank deposits for it. You are now the owner of $100 of bank deposits, right? And so what that means is the Fed show up and say, yo, that $100 was connected to the proceeds of a crime. The bank does not owe them the specific bills with the serial numbers. They just freeze $100 of your money because fundamentally all these forms of funds are fungible, right? There could be cases where it gets into the specific types of property, right? Like maybe it's a car, maybe it's a house, maybe it shares of a specific stock. But when it's just money, all of it is like fungical. So where do we run into the distinction between what's happening with the ATM and what's happening with USDC? - So next step for the banks is when you deposit that $100 that we just talked about, they credit $100 specifically to your account. So like if you, Jacob Robinson, or a customer of, let's pick Chase 'cause I used to work at JPBORGET just to use a company, so I'm not randomly picking someone. And they get a nasty ram from like the Department of Justice about you, they will take the $100 in your account. And segregate and freeze that. Like yes, you cannot withdraw. In fact, no other transactions are really going to be particularly possible in there, right? Like other stuff will start bouncing off at two. - Fine. But important point, that was your sub-ledger $100. JP Morgan does not throw all the funds in a giant pot that's just labeled money from the outside. And they're in lies the problem with these crypto exchanges, which is when you're in exchange, and you just have a giant hot wallet, with I don't know, $100 million of USDC in it, and they need $5 million out of that. And you're not responsive to US law enforcement, and not in a jurisdiction where you're cooperating. They're gonna go to circle and be like, you owe us $5 million. And circles gonna be like, we can't do that. Like all we can do is freeze the whole thing. And as I said, the answer is not, oh well that sucks. The answer is, okay, do that, and we'll sort it out. - And the implication from ZacXPT's criticism is that circle over included wallets grouping in addresses that should not have been included, and therefore infringing on the rights of innocent parties. And Austin's point is that this is a broader design problem, not just a legal problem, and that's something that we're gonna get into in the rest of this episode, back to the show. A lot of people in the crypto community were surprised, somewhere upset about this, you weren't, right? And if you look at circles terms of service, they have the discretion to do this in certain situations. - Beyond circles terms of service, even if it wasn't, in there they have the legal requirement to do it. Like I will remind everybody, if you have money transmission licenses in the United States or any sort of banker trust charter, you are covered by the Bank Secrecy Act. And there are all sorts of legal obligations that attach it there. Like if circle gets a nasty gram from a US regulator or law enforcement entity or a federal court, NIGO, NAAD, dog, they are very likely to lose their licenses. Like you cannot just ignore that stuff. And so this is something I've said often that I think the crypto community just ignored. For many years is if you are adopting real world assets, you are adopting real world legal and regulatory norms for those assets. And thus, if in a world you built your ledger and it can't conform with the real world legal process, the problem is not gonna be with the real world legal process, it's gonna be with your ledger. - Yeah, and USDC, I mean, since its inception had a blacklist function baked directly into the smart contract, right? Circle holds the admin keys. So they can freeze this whenever they deem appropriate. And of course, in the cases of law enforcement being involved, they're going to do that to protect themselves. - As they should. And by the way, this is not unique to circle. Like anybody who's like, "Oh, USDC was a bad guy." Like, what do we tell you right now? Tether and Paxos do the exact same thing and have the exact same capabilities. I would in fact go one step further and say if you have a fiat backed US dollar stable and you don't have this capacity, you are going to with certainty break the pag at some point. Because if you don't have that capability to stablecoin, the court also doesn't just give up, they go down the road to your custodian and say like, "Hey, Bank of New York, Melon, hand the treasuries over." - I think it's good to walk through for people. What's happening when they add an address to the blacklist? The balance doesn't disappear, right? The USDC doesn't disappear from the count. It's just a note. You can't move it until circle removes that address from the list. And that's something that they have in their terms of service. - Well, so there's some interesting details in there in a couple ways, which is circles contract to me appears to be a little bit underspecified and they're probably going to have to rewrite that for genius because you're supposed to have both freeze and seize capabilities. EG, they could zero that a count out or take money back out of it. - Arguably if they had, partial C's capability, this wouldn't have been needed. Right. Because again, in that, oh, there's 100 million in there. We need five million. I have a great. You just burn five million of that. Okay. So tether, for instance, is a little bit more granular. And I know Paxos was, because I used to like run the stable coins there. So there are better ways to do that than potentially circles way of doing it. The other part that I think was interesting and somewhat important that maybe was call it mist in there is, I'm not so certain that circles, T's and C's attached to people who are not directly transacted with circle. Like, can you have a contract of adhesion that the other person never agreed to? Opinions vary. Let's just say in US legal circles. Now, just a quick aside, circle tries to solve this problem directly in their terms of service says that sending US DC to another address, automatically transfers in assigns to the holder and any subsequent holder, all of the terms of the agreement. Circle is essentially trying to attach their terms to the token. So that whoever holds the US DC is bound. The problem is US contract law doesn't really work that way. You can't unilaterally bind a stranger to your terms just by writing it in a contract with someone else. So Zostin's about to explain circles authority to freeze those walls probably has nothing to do with their terms of service. It actually flows from federal law. Yeah, that was going to be my next point is, is there even privity between these two parties who are unrelated at the time? I know some very good lawyers who would tell you the answer to that is probably no. Now, that does not mean that circle does not have BSA obligations or does not have the right to freeze those people, but it may be that circles, T's and C's have nothing to do with it and all of the authorities coming from the back secrecy act. And it also could subject circle to action from the people whose assets they're freezing if they're negatively impacted in a big way. And they say, well, we don't have a contract with circles circles now arbitrarily going after us. They don't have a reason to do that in circles season C's section 13 says that the freeze has to be tied to some legal basis or some basis, not legal. It just can't be purely arbitrary. And section 24 states in all caps that the sole and exclusive remedy if you are dissatisfied is to discontinue holding and using US DC. So they displace all liability. I will also remind everybody the Bank Secrecy Act has a safe, arbor provision for good faith freezes and activities related to law enforcement. So I would argue no circle has absolutely no liability here. If you don't agree with me, I challenge you to go find US case law where this has ever been held against the companies doing this. There is some relating to certain mandatory government programs, right? Because that is the government itself like being involved with this. So arguably that overrides your safe harbor provision for private actions at the BSA. But if JP Morgan freezes your account, they had any sort of reasonable basis to do so. And the freeze is not unduly long or unduly onerous, you have no right to sue. And this is pretty well settled. There have been multiple cases on this exact point in the US court system. So no, I would tell anybody arguing that circle has liability like you all need to consult with your lawyer before you believe that. Now before we go any further, Austin makes a really good point here. And I want to pause and give you a bit more of a precise picture of the legal framework that he's referencing, because the details as like anything in this space actually matter a lot. So Austin says circle has a safe harbor under the BSA, the Bank Secrecy Act. It's a bit more accurate to say that they have something that functions like a safe harbor built from five pieces of law, rather than a single provision in the BSA. I went through the BSA didn't see exactly a safe harbor, but it's built out of these pieces. Now, piece one is the suspicious activity report safe harbor. The protection is almost absolute in most circuits. A financial institution cannot be sued for filing a SAR, the suspicious activity report, even if it was factually wrong. And even if the institution knew the information was incomplete. Now, piece two is the no tipping rule. So once that SAR is filed, the institution is legally prohibited from telling the customer that the report was filed. Now, the third piece connects the first two. So financial institutions are required under the Bank Secrecy Act to have internal controls around accounts that trigger these suspicious activity reports. And so in the context of a financial crime, for example, the drift exploit, you would think that the institution's own compliance program essentially mandates freeze. And we'll talk about that a little bit more in a second. Now, the fourth piece is that courts will not second guess the freeze. And this is where it's sort of all locks together. When a customer sues to challenge a freeze or recover damages, they're almost in an impossible position. The institution cannot disclose the SAR in discovery. And courts have consistently resolved this in favor of the institution where proper procedure was followed. Now, the remedial process is sort of that fifth piece. And this is where institutions like circle can still lose. In cases where institutions have been held liable for wrongful freezes, there's been two sort of characteristics. The first is that the freeze was unreasonably overbroad. It sweeps in accounts or assets that had no connection to the suspicious activity, which makes sense. Second, the institution had no adequate process to communicate with the affected party, investigate whether the freeze was correct and unfreeze the funds that turned out to be wrongfully captured. Now, all that said, it's a bit different in this case because this was a sealed civil suit. This wasn't a suspicious activity report that circle went and did on their own. This was a court order and a court order and a suspicious activity report or SAR operate us to sort of separate tracks of protection that often run in parallel, but are coming from different legal foundations. So as we said, the SAR protects compliance decisions that circle makes on its own judgment. The court order protects circle when it's executing a judicial command. The court order is a bit stronger in theory because a judge has reviewed the facts and made the decision. Of course, it's only going to be as strong as the quality of information the judge received. And in the case of a sealed exparte proceeding where the target has no opportunity to correct the bad information before the freeze happens, the quality control mechanism is the plaintiff's attorney and their expert, not the court. And that's where the accountability gap in the current system actually lives. And that's sort of at the heart of what Zach X PT was complaining about in his posts on X. Now we'll go back quickly to the episode. One thing we haven't seen hit the court system is what happens to defy platforms when we get these freezes because now a second order of effects can be enormous when we have these asset freezes. I would argue we just started seeing what those implications are, which is that defy is not going to farewell in the face of having to interact with these things because again, the regulated issuers have legal obligations. Code is not law, laws law, and you can't write private contracts to get out of your legal obligations imposed upon you by legislation or quite frankly, your regulatory frameworks. If this is like a bank or money transmitter or something like that, right? Like Jacob, you and I can't agree to ignore the BSA privately and think that's going to work. So the position this puts defying and I've been saying this online and people have been very angry with me about it, but I'm not wrong. You're just mad is that defy is currently constructed and quite frankly permissionless chains is currently constructed are completely incompatible with real world law and economic norms around these assets. So I've been explaining you could kind of pick two of the following. You could be permissionless. You could have real world assets and you could have any amount of complex smart contract interactions, but you only get to because right now here's a great example of a ticking time bomb. There's a huge amount of USDC and USDT and Ave lending pools. And if the North Koreans deposited a bunch in there, the US is not going to turn a blind eye. They're going to freeze the main Ave lending pools and get the money out of there. And that will break the entire bar lend protocol, right? Because now you've got a pool of assets that you need for it to function that are cross margin against other things that are paralyzed. Maybe not the greatest economic structure if you want to use those assets. One thing that I'm wondering when you say that is whether we can see defy adapt to account for that. Maybe it's through some sort of third party insurance program. Maybe there's some method of segregating funds in some form of internal account letters. Do you see that being a possibility where we can build these rules into the smart contracts that we're running? So the good news is yeah, I think it's very possible. The bad news is it's hard to do in a way that's going to preserve sort of the cipher punk ideal of decentralization if you want to have real world assets that there. And here's why. Fun, you probably are going to need subledgering in all of these things because your number one defense against this problem is don't put everything in a pile just labeled money, right? That is 90% of, you know, the simple layer of problems. But once you do that, suddenly everything on chain becomes a lot more fragile because you have all these individual like sub ledgered accounts and you got to manage that, right? Like reallocation. There's a reason banking is hard. Okay, so that's one of the issues. The other issue is that some of these commercial concerns are pretty nuanced, pretty subjective or resolution for them can take shockingly long periods of time, right? Like Unwideng Leibund's bankruptcy was not a 30 day thing. That was a multi year or deal for everybody involved. Hey, crypto people FTX was easier to unwind the leave it, right? So it's also going to be a situation where some of these things from like a protocol lifecycle development thing just need to be part of it. take it off the table if they get implicated in certain ways. The last part of that is we're talking about freezing, but there are many, many, many other types of problems related to this. So, you know, good argument if you want to trade tokenized equities. We need a white list and we need to know who the owners are. Why? Because there's a lot of rules in the 40 act around things like voting rights, insider holding, trade monitoring, and you actually, you know, have to be able to do all of that. Again, the law doesn't go away just because you put it on chain. And so all of this takes a radical rethink and some at least set of multiple parties with centralized power over the system. Because the other thing you're going to find out the hard way as you do this is the argument about the issue work can handle it. No, that is factually false because at some point the issue is going to get hacked. Right? Like no defense is strong enough. You're going to need multiple redundant layers of control for any of the RWA's to work properly. And like, look, I'm not saying I love it, but that doesn't sound terribly decentralized to me. Hey, Jacob here again, just jumping into the podcast one more time. This is something particularly interesting. And this was a big debate on X as well over what circle can do to address exploits like the drift hack and how they can help work with the ecosystem. And they actually came out with something on April 10. So a few days from this recording referencing the drift exploit and circles chief strategy officer and head of global policy and operations Dante Disparte published an article. And in this he spoke about when circle freezes US. He says it's not because we have decided that someone's assets should be taken from them. It's because the law requires us to act. Now what he also mentions is the gap between law and speed. And he calls that a policy problem. He also goes on to write that circle is actively engaging with policy makers in the US and internationally to develop safe harbor frameworks and modernize regulations so that they can and I'm adding these words so that they can intervene when exploits happen in D5 for example. And that's something that I think we should be encouraged by obviously, especially with US stablecoin legislation and the genius act and then broader market structure rules under clarity, representing an opportunity to codify these standards. So it's definitely not ideal where we're at, but we are moving in the right direction to a space where D5 can exist independently. Obviously it does need to bridge these gaps in some way back to the episode. And your assumption that they'll need to be a central party is that because someone needs to respond to the legal system when issues come up. Correct. Like judges are not decentralized. I guess is the way I would put it, right? Like you were responding to like one specific man or woman in the Southern District of New York and what they say goes, right? That is not a decentralized system. And by the way, if people have the right to like vote to ignore that, you also have a very big problem. Like it must be mandatory and baked in. So like again, obeying court orders is not optional for like US based issues. And as a result, like all these things of decentralized governance and voting and like we're going to get to neutrality by just distributing authority. You cannot do that at this space. That's not a thing, right? Another example I use is if we tokenize housing title and the North Korean steel grandma's house, they're not going to get to move in, right? Like no judge is going to be like, well, I mean, a bunch of randos. We don't know running ephalidators say the North Korean zone it. Like whether you like it or not, the ultimate arbiter of who owns that house is the US military. I think what's interesting is we're starting to see more dynamics with the Duna, for example, in Wyoming, where we're having these on chains or decentralized protocols, voting to adopt or have a third party act as sort of a liaison with meat space for them. And to me, that could be one way where DeFi can emerge from a system like this, where there's some rules that are encoded where this third party needs to be fully trusted and what they do can represent the actions. And maybe that does sort of bring it back to a centralized system. So we think of decentralization using Bitcoin, I think is the best example where the US government can't go to someone and just freeze your Bitcoin. I mean, they could try and there's probably a way in the long run to do it quantum computing as you wrote about today is a big thing that's coming up. But right now it's very different than what we're seeing in most DeFi. So yeah. And to some extent, I want to give the Bitcoin community props here for being ideologically consistent is you don't see a lot of folks on the Bitcoin side being like, we should put all financial assets on Bitcoin. Like they know the game there play if you want to be decentralized and not responsive to court orders, the best way to do that is do not put real assets on your chain. Right? Or if you're going to put them on your chain, don't do anything complicated with them. Right? Like it's very easy right out of tokenize the security and put it out of theory. What's hard is doing anything with it after you've done that. Right? Like that's where all the problems start. The moment you're in AMM pools and borrow lend protocols and auto compounders, dropping a new smart contract to just repudiating all those things, wrecks every single one of those. You've talked a bit about permission system and I've seen some controversy online about permission, versus permissionless and what the future might look like. Walk me through where you see that sort of line being drawn in the sand because I don't think systems like Bitcoin are going away. But like you said, once you introduce the law in the case of real assets, because you want the benefit of the law, right? You want that asset to represent title to if it's going to be a bear instrument to represent title to whatever it is. It's representing. But if you want the protections, you also have to have all these responsibilities to courts and the US military, ultimately. Yeah. And so like, in fact, thinking about both of them as a contrast is a really useful thought experiment to understand what's going on here, which is to say Bitcoin to some extent is like the cipher punk utopia of no government can tell us what to do. But the other side of that sort is that Bitcoin is mad Max. That is to say if there's a warlord running around killing people and stealing everything, there's nobody to tell them what to do, right? Like nobody's coming to save you on Bitcoin is the way I would put it. So if you lose your coins, they're just gone. And that's working as intended. Now, the good news there is if everybody understands that and people are opting in. You have a system where it may still be significantly better than your local system to deal with this. And one where by keeping your call in a tax surface small, as it I'm not putting it in all these weird defy protocols, I just have it in like my wallet. You're at least immune to some forms of attacks like ironically, you know, hacked it to xkcd the guy with the $10 wrench is still going to get you. But overall, you know, I think you're in. Okay, is shape certainly compared to being like, I don't know, Venezuela back. In most cases, but the flip side is if you want like US cattle markets, that's unwarkable, right? Because you've given maximum power to the criminals and bandits. So let's come over here and look at that. Now we're in a world where we need obey laws where there are like restitution requirements, where people do have to have controls around things. And the problem is you need a system that can reflect that even would individual things break. Right? Like if you want to look at the underlying logic of some of the very malformed things that were done in the US under the Biden administration, there was at least some thought at the start of it that was correct. Like, SAB 121 was terrible. And like I'm on the record having opposed it. But the core idea of like if I'm a regulated custodian and I have liability for my customer assets, and I hold something like Bitcoin, where if it gets stolen, I can't get it back. I should have to hold capital against that asset is correct. And so if you want to start moving, call it equities to a world where Boney Melons got to hold a hundred percent capital against all the equities they're the custodian for you a they vastly more expensive, vastly more inefficient, vastly slower system than the current system we have. Because let me tell you errors happen all the time. And like commercial disputes happen all the time. So you're going to need an efficient way to handle those or it's just unaccompanied to adopt the system compared to current. When you have a centralized actor, it's a lot easier. And I know a lot of people who love the idea of Visa being able to refund a transaction that was made on their account fraudulent. Yeah. And like again, as you look at real usage by real people, a lot of it is I would prefer a centralized intermediary who is the expert to do all these things on my behalf who has liability. Like a good example of this I use is my mother, right? The reason I use her is that my mother is actually really smart. Like she is a nurse with two master's degrees who ran like UCSD's bone marrow transplant clinics. And she's literally like saving kids with cancer and stuff like that. And that was her job and that's what she thinks about. So to go to my mother and be like, Mom, listen, I know you're spending all these time saving kids with cancer. But those kids you need to spend more time understanding how private key like security and safety works. So you can use the decentralized future of money. She's like going to kick you out of her house. And she's going to be right to do that. Like one of the things crypto people really don't understand because they only talk to each other. Is that if you think everybody will adopt technology at the most granular level, you are at war with the concept of specialization of the labor. And nobody in the history of economics has ever won that fight. To me, the long run will always be similar to the internet where we don't think of these businesses as internet businesses. We just think of them as businesses. You don't really understand how the internet works. You don't understand the protocols on the back end, but you know it works. You trust it works because everybody else is using it. And I think if crypto is going to get to that point, it's going to be through adoption of things that tie into what people already understand and give them a better way to do that. No, that's correct. completely corrected. By the way, if you disagree with that, you're watching this podcast, please explain to me right now without looking at anything up how semi-conductors and TCP IP work, because we need both of those to get this to you. And I guarantee neither Jacob nor I are deep experts in those things, right? Like you have to make it usable for normal people. Well, I've seen a video on how semi-conductors are made. So maybe I could answer that a little bit, but no, it's unbelievable. Would you make one? Right? Yeah, there are layers to this problem. Imagine if everyone who knew how to make a semi-conductor disappeared. Like it would be so. The society would collapse for thousands of years, be like the fall of the Roman Empire, the fall of the semi-conductor empire. Yeah. And this is my point about the banking system as well, is there's a lot of embedded knowledge in there and reasons that things were built the way they were. Not all of those are good reasons. Some of the definitely need to be changed. And like I certainly a believer of that. I'm in this space for a reason, but not all of them need to be changed. And it's the classic thing of, hey, before you tear a fence down, you should know why it was there. And there's so many benefits to that we've seen, but also one of the benefits, in some cases, is being able to freeze funds. There was the drift exploit where North Korean affiliated group apparently spent six months sort of establishing relationships, faking identities, and eventually stole hundreds of millions of dollars from a protocol. You call this the perfect example of where circle should have been required to freeze USDC under the Genius Act once finalized rules are in place. They didn't do that in this case. And the crypto community was very upset about that. Even though typically there's a cultural bias towards letting things play out the way they are, they wanted USDC frozen in this case, and it didn't happen. Walk me through your thinking there. Yeah. So on, if you're upset about USDC being frozen in that sealed court case and you're not upset about drift or vice versa, you are a hypocrite. Right. Like you need to go back to the first principles of what we're doing here because any sort of call it suspicious, legally dubious activity should be frozen or not, but you kind of can't pick and choose the ones you like and don't like like a standard is a standard. But I'm very much obviously on the side of circles should have frozen the USDC in drift. And that's for, I'm going to call it three reasons. And there was pretty good online chatter indicating that this was a hack at exploit. There was not a lot of doubt that something bad was going on here. And certainly from a bank transaction standpoint, for instance, if news just hit that there had been a giant exploit on Amazon and you're a bank, and suddenly you get a truckload of Amazon activity from bank accounts of people who you bank that you know might be implicated here, you should probably freeze all of that, right? Like that is how your legal obligations work. And I would argue circle. Certainly I expect when like the OCC, the FDIC Treasury finish rulemaking will have those obligations. Arguably they have those obligations right now under certain M T Ls that they hold. So we'll come back to that one too. As a good housekeeping thing for crypto, if you think that protocols being exploited is a thing that should be allowed to happen, you were telling 99.9% of people in the world not to use a blockchain. Right. Again, my mother is at work. She's not looking at her phone. And if you tell her, well, you need to take your op sec seriously in 24/7 monitor this thing, what you're telling her is just don't use it, right? Like the brain surgeon can't be like, let that guy die. I gotta go deal with this hack, right? You like bounce. That's not how that works. And so to live in the real world, somebody's gotta be deputized to do this, right? As a functional matter. Three, I suspect again, as somebody who's bet on the point the end of this at banks before circle created significantly more liability for themselves by not freezing it, they did by freezing it. There is a safe harbor in the BSA for freezes. There is no safe harbor for failing to act for known criminal activity. So if somebody was a USDC holder and goes and sues circle over this, they've at least got an arguable point here. And I will remind everybody of the earlier part of this podcast where we said the T's and C's don't apply if you're not a direct like relationship with circle. So you're looking at like defective like product claims, you're looking at like willful negligence claims. Somebody who lost a lot of money is going to sue circle and say you had M. T. L.s in this state. I live here. You had a duty to do these things. You did not do it. I was damaged because that's like that's the one they don't have a safe harbor for. It's really difficult when it comes to these defy exploits because at what point is it officially an exploit versus someone using the pro like, you know, how do you do that? And what circles traditionally done is respond to court orders, respond to sanctions, right? When the US Treasury sanctioned tornado cash circle moved immediately. It froze over 75,000 USDC held by wallets connected to the mixer within a few hours when a quarter order came and connected to the Libra meme coin case. That was 2025 circle froze 57 million dollars in USDC. So they have obviously they have the capability, but they've done it and sort of looking through their history. It's always been connected with some sort of government order, not just hey, there was an exploit because then it's difficult. You have to have a line in the sand at some point or else any small exploit are you going to just freeze a whole protocol. So one, the BSA is not a purely reactive thing. You do have proactive obligations as well. Even if the government didn't put a wallet on the OFAC sanctions list, if you have reason to believe that an OFAC sanctioned person owns that wallet, you are supposed to freeze it. Right. So I think the stance of we just wait for the government is going to prove insufficient both after rulemaking and to be blunt in a future world just in court. Two, I will remind everybody the way BSA freezes work is that is not a permanent seizure of funds. That is a temporary freeze. It could totally be the case of our previous example that no, I did it. In fact, by that coffee table on Amazon, you can let it go. Right. I give my bank a thumbs up and then they let the thing go by. Right. Again, non-ownerous freezes that could be properly discussed are not a problem under the BSA. And this is where I'm saying DeFi is going to need a radical rethink where those things are going to start happening more. If you did not build your protocol for that, like I don't put that on the issue or like this is the law. We all knew that the rules are being written. If you build something that doesn't work with that, like I quite frankly file that one under poor craftsmanship. When you're building your protocol and you're bringing USDC onto that protocol, you're taking on that risk and your customers might not be aware of the risks, but you as the as the platform and project should definitely be know what you're doing and what you're signing up for and exposing your customers to. Yeah. And not like legal advice, necessarily, but after all these rules become final, if I'm a protocol developer and I'm not thinking about those things, I would also be worried about being sued if something happens. Yeah. Yeah. And I know Austin said not legal advice, necessarily, but definitely nothing here is legal or investment advice. Yeah. It's a really interesting thing because I think in the typical system, number one, obviously, you have intermediaries, which can hit pause and do hit pause when things hit the fan. A lot of those things would get reversed. Right. Like even if you know, say it was a chase that it goes to city, another back I've worked at, I've just purely picking people like work that, you could probably just get it back from city. Right. Like so it's hard to get all the way out of the US banking system very, very quickly. And that's for a number of reasons. One, there's some economic reasons, but two, you know, those intermediaries you just talked about, often they have the liability. Right. So they're not going to do like real time gross at giant scales until they are 100% sure that this money is going somewhere it is supposed to because if they screw it up, they owe you the money back, not the other way around. And again, back to how do you build safety and have normal people use it. If you tell somebody, you own 100% of the liability. So you have to be 100% sure about everything for the normal person. That means don't use this, right? And if the intermediary has liability, they're not going to waive through the drift act. And this right all the way back to why do I think RWA's on chain are going to require significantly less decentralization than people like it's because liability attaches to people here, right? You kind of have to live with that. If we want the benefits of legal protections, in one case, you have to take the downsides or the risk that come with them. And that's going to be a big theme over the next few years when it comes to tokenization of real world assets. Land title, we've seen all of it sort of begin to emerge. Obviously with what we've seen from the Securities and Exchange Commission Chair, there's going to be a world where assets are on chain. Now whether they're on chain and permission blockchains permission list, that's still to be determined. Let me, let me give an important detail there, though, which is those are not binary states of being right. And also often people conflate public and private with permission and permission list. You could in theory have like a public permission chain or a private permission list chain. And to some extent, some of those things already exist, like, you know, call back to 2018, but I will remind everybody, I think the chain with the second most RWA on it right now is stellar. And that is a great example of a public permissioned block chain, right? Where the default is you can join and that you can use things, right? And even that you can run a validator. Now there's tearing of the validators, but you don't need permission just to be involved at all, contrary, like I can't understand how it works. Right? So they are public, but with a lot of permissions and controls. And so they've been a very popular destination for regulated asset issuers who start looking at how do we not just tokenize the thing and represented on chain, but like, you know, do stuff with it once we've done that, right? Like Franklin Templeton started there for a reason. And so, I think the answer to this problem is that the crypto community is at like at best a 101 level understanding of these problems And you're gonna need to get to like graduate school level because the problem is significantly more granular and complex and Describing it as a binary is in fact part of the problem And I think also too the evolution of digital assets when it comes to like different systems That's not gonna be binary either It's not like oh, we've gone from no real world assets being on chain two them all being on chain And they're gonna sit in these permission systems That could change in the future as well as the crypto community learns and evolves and things get tested and proven Much more people buy Bitcoin today than they did 10 years ago because it has that history behind it and people are much more comfortable with that And I think we'll see the same thing in blockchain now whether we can get to a point where we have purely decentralized systems Trading real world assets that's gonna be difficult That's gonna require some connection with the law the traditional finance world what that looks like I think is still to be seen also highly variable by asset Right like the amount of controls we need for like a stable coin or tokenized gold might be very different than the amount of controls We need for tokenized Apple stock where now you have voting rights and that may be very different than what we need for like Tokenized interest rate derivatives right where like you can't even trade those with accredited investors much less retail like that's Qualified institutions only and you're signing like is does and stuff so like the stack of permissions and how those permissions apply is like an Accordian but it's like a three-dimensional accordion right there's not even just one axis like you're fighting on three different axes here So it is this is why I said we need to get way out of like the binary thinking about it This is a very complicated problem. Yeah, and my mother was a nurse as well too, and I'm sure like yours She's very happy to pay 3% tax that striped charges to make a payment and have that piece of mind so she doesn't need to think about all this stuff that we enjoy talking about so much Austin thanks for joining me today, man. I was great. Thank you very much Now if you're working in crypto you need a law firm that understands your business. That's why I'm happy to thank today's presenting sponsor day one law Day one law is boutique corporate law firm founded by recurring guest and friend of mine Nick Pullman Nick and his team at day one law provides strategic legal counsel to web three innovators crypto projects and founders You can get in contact with them in the show notes below or at day one law dot x y z and make sure you say hi to them for me And thank them for helping support this podcast now. I'm obsessed with making this podcast the number one legal podcast in the world and you can help me do that. 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