#201 - The CLARITY Act

[MUSIC] Now, if you've clicked on, if you're listening to this podcast, there's a good chance you've heard about the Clarity Act. But how many people have actually read the 309-page bill? And how many people understand the implications of it? My goal with this podcast, even if you don't have any background in law, even if you've never read a bill before, even if you don't know much about crypto, you'll understand the Clarity Act better than 99.9% of the population. You'll also have background on where the gaps exist in the current status quo, which is why we need the Clarity Act to pass. What this law changes and what the next steps are as the battlegrounds change from conversations around things like yield to ethics provisions. Most importantly, you'll be in a position to best operate in the world where Clarity is passed because you'll understand the new rules and how they apply. Before we begin, I want to start with a take because I really do believe this to be true. It might sound like an exaggeration and it's certainly not true in every case. But when people fight for their country, when they immigrate to a new country, when a country like the United States becomes a world leader, it's not because of the people. It's not because of the president or the flag, or even to an extent, the army. It's because of the laws, because of what the laws are and how they are upheld, because of what they incentivize. Objective laws provide the freedom and equality that attract the best people in the world that incentivize the best people in the world to build things that make the world a better place. So as long as these laws are upheld fairly, they shape the country just as the country shapes them. Laws, what I talk about in this podcast, Law of Code. For those of you who are new, welcome. My name is Jacob Robinson. And in this podcast, I covered the legal layer of emerging technologies alongside leading experts. My goal is to help people understand the rules that shape our society. So think of it like the Hubertman Lab, but for law. It should be the best legal podcast that you've ever heard. And if it's not, you let me know why and I'll improve and I'll make it better next time. So far, this podcast has been approved for a substantive, continuing, professional development hours for lawyers in Ontario, Canada. For any American lawyers that are listening, my goal is to get the same thing approved state by state so you can get continuing legal education credits. And for anyone who's not a lawyer, I promise you don't need to be a lawyer to listen to this at all. Now, this episode is specifically about the Clarity Act. And so to prepare for this, I spent about 40 non billable hours just understanding the rules and clarity rereading the case law around things like the how we analysis and investment contract tests and read online commentary on clarity. And then I spoke to the world's leading experts on this subject. And that's who you're going to hear from in this podcast. So joining me throughout our Lewis Cohen, he's a partner and co-chair of K. Hill Next. And he is the foremost expert on investment contract analysis and digital assets in the US. You'll also hear from Miles Jennings. He's the head of policy and general counsel for a 16 Z crypto who like Lewis has been involved in thought leadership in this space for years at a deep level. And I'd give Miles a lot of credit for the token classifications we see in this bill. Same thing to Lewis. Similar credit is owed to others who join this episode that includes Sarah Brennan, general counsel at Delphi Ventures, Kyle Bleigin, head of policy and public affairs at the decentralization research center. Sarah and Kyle have worked deeply on clarity and understand its implications and the process to get it passed as well as anyone. And if that's not enough for you, we also get commentary from the CEO of the Salana Policy Institute, Miller White House Levine, who joined me from Washington just minutes after being in the room during the Senate banking committee markup. We also hear from Dougan Bliss, a former SEC, so Security Exchange Commission trial lawyer, who is currently finances head of litigation, as well as bill Hughes from consensus and Gerald Galger from crypto and America. Jason Schwartz from K. Hill next to tax lawyer also joins for one last important segment. Honestly, that you really need to stick around to the end for it. I'm not just saying that because it works out really conveniently for the podcast. Like I really do recommend sticking around for that. So I work my ass off to make this the best explainer on the clarity act on the internet. I didn't get paid for this. And as you can tell, there aren't any sponsors. All I ask from you, if you learn something from this, if you like it, if you want to support this type of work, please just like it, subscribe to the podcast, wherever you listen to podcast, it really helps. So we're going to get into clarity now after a brief 20 second legal disclaimer. Anything mentioned in this episode by Jacob Robinson or his guest is not legal advice or investment advice. All opinions are Jacobs and his guest 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, let's start at a 10,000 foot view. What is the clarity act? You've probably seen everyone refer to it as market structure legislation. But what do we mean by that? Well, market structure means exactly what it says. If you just invert the wording, it's the structure of the market. In this case, it's about the rules governing how digital asset markets, meaning places, people trade, are organized. So wherever people trade these assets, that's what we're trying to regulate here. And obviously, there's a lot more to it than just that. It defines things like who and what can participate in these markets by answering the core questions that have plagued the industry for years. You might be thinking, okay, well, what are those core questions? Well, here's a few. Can someone sell this token without implicating securities laws? Is the token itself the security or is the relationship between the parties the security? And an exchange list is token without being registered with the securities and exchange commission. That's just the tip of the iceberg. Talk to any lawyer, whether they consider themselves a crypto lawyer or not. And they'll tell you that the questions here are endless. It's great news for someone like me who loves recording podcasts, but it's awful news for builders. Because these people have had to spend the last six-ish years worrying more about legal structuring than actually building good products. I'll let Miles Jennings from A16s he explained that now. I think people don't really appreciate how much distortion has happened in the crypto markets as a result of the lack of a clear regulatory scheme. And if you go down the list, it's just overwhelming in the sense of how much the regulatory scheme has shaped what got built, who succeeded. And I think as a result of that, it's really held back the industry in terms of its overall potential impact on the broader economies. I mean, if you look at it right, we have no standards. So there is no real kind of benchmarks for quality. You can imagine a world where like public companies didn't have financial statements. Like how would you possibly compare one to the other? And I think that that's one of the things that we've been dealing with in crypto. There's been a lack of transparency. And that was because the regulatory framework basically incentivized people to be opaque. And you know, that you can see that without clarity, that's going to continue to be the case. Even the SEC's like latest guidance on, you know, whether or not tokens fall under securities laws is like all around whether or not the builders make certain representations to, you know, the people that are, are, you know, buying the tokens. And it's like, well, they're just not going to make representations then. And so like you're just going to lead to more opacity. So it's like, it's not a problem that can just be solved, you know, under the existing regulatory scheme. So like, you know, perpetuating that lack of transparency is just something that is generally bad for the industry. And so whether startup industry really has to deal with like, hey, you have to be quiet about what you're building, right? That's just like an insane prospect for trying to build an innovative sector. And then the, you know, the lack of a clear regulatory perimeter meant that there was just a ton of gamesmanship that's been going on, right, around like, how do you fall outside of the regulatory perimeter versus, you know, within it? And you know, as a result of that, like, it was often the case that the people that were taking the most risk, right, the ones that were building products that were most likely to be violations of the law were the ones that were winning as long as they could get away with it. And that just is a scheme that ends up, you know, with FTX is out competing coin bases or sushi swaps taking volume from a, from a uniswap, right? Wherever there are like bad actors that are willing to push the limit as far as they possibly can, you know, they're going to attract a lot of eyeballs. And that's not really fair to, to good faith entrepreneurs. Everyone should be playing by the same rules. And you know, that's also led to a lot of convoluted solutions. People have been optimizing for, you know, being outside of the regulatory perimeter as opposed to optimizing for products that people want. And, you know, that is again, not a way to build a successful industry. And then I think finally, right, I would say that, you know, just like regulation can distort markets, the lack of regulation can distort markets. And so as we've seen, right, a lot of the projects that have succeeded are like, it's vibes based and as opposed to fundamentals based. And I think, you know, when you put all of that together, I think that the generally that industry has just been held back significantly by the lack of a regulatory framework. And, and all the promise and potential, right, I don't think we're ever going to get there if people aren't just playing by the same rules. So, you know, at a 16 Z, I think the thing that we want is just a level playing field for all entrepreneurs to be able to compete. That means everyone being in the same regulatory perimeter. No one getting advantages because they're taking on more risk or obfuscating anything like that. Let entrepreneurs compete, best product wins. And that's what's going to lead to the most innovation. And as you'll see in this podcast, what I do is I bring in people like miles and the other experts I mentioned at the top to intermix their thoughts throughout. So it's not, don't worry, it's not all just me. We've got real legitimate experts here who are going to talk through these things like miles, like Lewis Cohen, like many others. Now I just want to touch on the framing that the industry was held back. And I don't love that sentiment. I think about it on, honestly, in a broader way because this is obviously about so much more than the industry of crypto. Because the industry of crypto just means people. It means American builders, some of the brightest minds in the country in the world who build things that are positive. for everyone. Like when it gets more efficient for you to send money to a third world country, that's a win for you, that's a win for the person in the third world country, that's a win for society. Now without passing the Clarity Act, the 70 million Americans who hold crypto will be left without consumer protections that the draft legislation provides. The second order effects of that are less jobs, less opportunity and less resources for Americans. Anyways, the problem here is that there isn't one box to check that fixes the legal questions around the digital asset industry, which is why Clarity's over 300 pages long. What does it do? That's what we're going to get into now. We want to start with some history because Clarity then just pop on the radar a couple of weeks ago or months ago. This is a long time coming. On May 29th, 2025, so last summer, the digital asset market Clarity Act. So that's actually what it's called. We just used the Clarity Act for short. Was first introduced by nine co-sponsors from both sides of the political aisle, so on a bipartisan basis. A sponsor in Republican said, quote, this landmark legislation will protect consumers, unleash entrepreneurship, and ensure the United States sets the global standard for the future of innovation. A sponsoring Democrat said, quote, by protecting consumers, promoting transparency and closing regulatory gaps, this legislation will ensure that America remains the global leader in digital asset innovation. And I think both of them are correct and in alignment. How great is that? It really like I think by the end of this, like me, you'll have more faith, a lot of faith in the political side of things. But you know, that May 2025 announcement wasn't the first for digital asset market structure in the US. On July 20th, 2023, a bill was introduced to accomplish the same goals as Clarity. That wasn't the financial innovation and technology for the 21st century act. So fit 21. A lot of people in this in the industry know it as it was also introduced on a bipartisan basis because this isn't a Republicans versus Democrats thing. Anyways, we actually have to go back further. So we have to go back to June 10th, 2022. So almost four years ago from the date I'm recording this when senators Cynthia Lumis and Kristen Gillibrand introduced the Responsible Financial Innovation Act, the RFIA. At the time, it was the most comprehensive digital asset bill ever put forward to Congress. We also saw the digital commodity consumer protection act of 2022. The DCCPA proposed that summer, which tried to get the CFTC to regulate the crypto spot market. So what happened with those bills, right? Like, why did we not get rules earlier that would have protected Americans? Well, they stalled for various reasons. The biggest was the collapse of the offshore custodial exchange named FTX. You probably have heard of it. Its founder, Sam Bankman Fried was later convicted for stealing billions of dollars from customers in an old fashion fraud scheme. SBF was a supporter of the DCCPA, which basically crushed it and the fallout of FTX's collapse led to revisions in fit 21. Now, the one I think that is most important to follow is the RFIA. That's the bill that was introduced by senators, Lumis and Gillibrand in 2022. That had an updated discussion draft released in 2025 and has since actually been paired with certain points from fit 21 and the 2025 version of the Clarity Act to create what is now considered the most current form of clarity. And that's the version that I'm going to be talking about throughout this episode, which is the 2026 bill that just advanced through the Senate banking committee. And it's now closer to becoming law than any digital asset market structure bill we've ever seen. Here's Miller White House Levine, the CEO of the Salon of Policy Institute, who has been a long time proponent of DeFi and the importance of the rules here. He was also in the building during the Senate banking committee's markup and he spoke to me just minutes after it concluded. I asked him his biggest takeaway from an event for morning and I think you'll like his answer. I think my biggest takeaway is like I think for the first time in my career in Washington working on crypto policy. It feels like this bill is actually going to become law like if I got into my head today this afternoon, I would tell everyone to get serious because this thing is moving and I do think there will be further changes from here that we're going to have to probably fight to prevent further changes. And the stakes are just all the higher because I do think this train is out of the station at this point and whatever version ends up on the Senate floor and the House floor will become law. So it feels very real. It's definitely sobering and more work to be done. So what is clarity, right? And what does it actually do Jacob? We have to start with what I consider the most crucial goal of clarity. And that is to provide guidelines to provide a level plane field for Americans. The most obvious way that clarity achieves that is by defining and categorizing various types of tokens as well as differentiating the regulatory schemes that apply to them. Clarity really creates four distinct categories of tokens under law. I'll let Miles Jennings explain that. I would say that there's really kind of four categories within the taxonomy that clarity creates. So there's there's digital commodities, right? So digital assets that are commodities that are not securities. Then you have digital securities, right? So tokenized securities that falls in that bucket. And then you have payment stablecoins, right? That's what genius covered. And then you have kind of non commodity digital assets, non securities, right? There's this other category there. I would put like NFTs and things like that, right? So clarity is, you know, there is a safe harbor for NFTs and clarity. But the main focus is on that digital commodities bucket. Now as Miles said, the main focus here is on digital commodities to properly unpack what constitutes a digital commodity. We need to take a step back and understand how these assets are regulated. Let's do that by talking about the primary regulators here. We've got the Securities and Exchange Commission, which as you can guess by its name, governance contracts or financial instruments that are known as securities. There's also the commodities futures trading commission, which governs financial instruments for commodities. Now, securities are defined by a relationship and an investment between two parties. Quantities are a bit more tangible. They're tied to usually physical goods or some form of tangible or maybe intangible financial instrument like a swap. I've got an upcoming podcast on Purps that explains this in much more detail. So make sure you subscribe to this podcast so you can get that. But what are digital assets, right? Are they securities or are they commodities? Most lawyers would answer that question with and it depends. Some digital assets like Bitcoin were considered commodities, even by former securities and exchange commission chair Gary Gensler. That would mean that any financial product that derives its value from the spot price of a commodity, a digital asset commodity like Bitcoin, i.e. a derivatives market for Bitcoin falls under CFTC jurisdiction. Just a quick FYI because it's important. The CFTC doesn't regulate the commodities themselves. They wouldn't regulate Bitcoin itself, but they'd regulate the financial contracts for future delivery that derive their value from the asset hence derivatives by saying that some of these assets were not securities without a detailed legal explanation as to what the originators did to make those tokens non securities. What happened was the industry was forced and not just the industry like everyone in the world was forced to try to figure it out themselves. When does an asset become a commodity versus a security when it's a digital asset? And all they really had to go on was the Dow report and a 2018 speech by former securities and exchange commission director William Bill Hinman titled digital asset transactions when how he met Gary plastic. That speech suggested that projects that were sufficiently decentralized could issue tokens without fear of being offside the securities laws. Now imagine hearing that speech as you're trying to build a startup in the US in the digital asset space and the blockchain space. Suddenly sufficient decentralization becomes just as important as building a good product. It didn't help that the SEC under former chair Gensler begin to attack projects that were operating in the space with his regulation by enforcement campaign and to be fair to chair Gensler there is plenty of grift in the crypto space. The problem was who he went after the projects trying to do things right versus a lot of the other projects that have been committing fraud in the space. Miles Jennings explains here. It the ones that are building products that were most likely to be violations of the law were the ones that were winning as long as they could get away with it. And that just is a scheme that that ends up you know with FTX is out competing coin bases or Sucy Schwap's taking volume from a from a unit swap right wherever there are like bad actors that are willing to push the limit as far as they possibly can you know they're going to attract a lot of eyeballs and that's not really fair to good faith entrepreneurs. Everyone should be playing by the same words. Now okay you might be wondering well wait a second Jacob why can't these businesses build a good product and follow the laws they seem to do that in most other industries. It's a great question and the answer honestly is complicated so it's a fair question to ask. It's because the laws don't allow these products to exist and that might sound extreme but it's true. The laws don't allow these products to exist and I think the most basic example I could give is how would an exchange trade spot digital assets in the US recall the CFTC regulates derivatives so a market for derivatives of Bitcoin could be traded on a CFTC regulated exchange. But what about the exchanges that actually trade Bitcoin and other digital assets themselves. What do we do right there was no rule book on how those exchanges are going to operate and guess what the crypto industry wanted a rule book this is why I get frustrated when I hear politicians weaponizing this bill. They say it's saying like crypto wants a free pass 'cause it's literally the opposite. This is the industry wanting regulations. Anyways, back to the situation. So there's no rule for spot commodities on these exchanges, but there are plenty of rules for securities markets. And honestly, a lot of tokens, definitely not all of them, but a lot of tokens look like securities. That last sentence is why the SEC under former chair Gensler took the position that most tokens are securities. And securities is defined in section 21A of the Securities Act of 1933. That section lists the type of instruments that are securities and therefore within the SEC's jurisdiction. That includes notes, stocks, treasury stock, bonds, debentures, evidence of indebtedness, certificates of interest, or participation in profit sharing agreements, and a host of other ones that I won't bore you with, but basically to evidence some sort of investment related relationship. Now the history of the 1933 Securities Act is really important to understand. It was enacted after the roaring 20s, a period defined by leverage speculation of risky stocks on margin and the ensuing great depression. The Securities Act of 1933 was intended to be broad enough to capture nearly any sort of scheme that people could come up with to raise money for some sort of project that could lead to risks for investors. And that's why that definition of security tries to cover nearly every type of economic investment relationship. Remember, it's any note, stock, treasury stock, security, future security, base swap, bond, debenture. Like there's a huge, huge list, and I'll put it if anyone's watching this. I'll put that on the screen now. There was one term in that definition of a security that is the broadest of them all, one that would be later used to capture digital assets of technology that wasn't invented until nearly a century after the Securities Act was put into place in 1933. If you're at all involved in the crypto space or the legal field, you'll recognize that term. And that is investment contract. Maybe it gives you PTSD. I know a lot of people fairly would agree with that. The investment contract test is what the SEC under Chair Gensler used to allege that tokens trading on crypto exchanges were securities. Now, investment contract is not defined by any statute, by any law. That was a deliberate step by Congress to capture arrangements that didn't fit neatly into named categories like stock. So early courts had to decide, and they took a form over substance approach, meaning they looked at the economic reality of the transactions to determine whether an investment contract existed. An investment contract in the early years came to mean a contract or scheme for the placing of capital or laying out of money in any way intended to secure income or profit from its employment. And that was from the state, the Go for Tire and Rubberco case. That definition was applied to buy courts in the US on a consistent basis until 1946, when the Supreme Court decided the Howie case. That's SEC versus WJ Howie Co. The Howie case defined an investment contract in a really smart way, considering the test that needed to be vague to capture form over substance. Now, before we walk through that test, here's an interesting part of the story that no one really talks about. Why was Howie in the Supreme Court in the first place? Why not just follow the principles from Go for Tire? Well, Howie was in the Supreme Court because the fifth circuit court of appeals and the lower district court both suggested that, quote, "an investment contract is necessarily missing where the enterprise is not speculative or promotional in character and where the tangible interest which is sold has intrinsic value independent of the success of the enterprise as a whole," unquote. That's a really interesting concept because what that's kind of saying is a lot of the principles that we're talking through in clarity when we talk about network tokens. And I'm really excited to talk about that, so stick around. But let's focus on Howie because what the Supreme Court judges did was recognized the policy implications of allowing issuers to sell investment contracts without protections for investors. So they defined the Howie test as a method to determine whether an investment contract exists. It was defined as follows, quote, "The test is whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others. If that test be satisfied, it is immaterial whether the enterprise is speculative or non-speculative or whether there is a sale of property with or without intrinsic value," unquote. And that was because of the reality of the Howie case it was involving orange groves that were being sold. So those oranges themselves had intrinsic value much like digital assets can have intrinsic value because they're tied to the blockchain. And that really, I mean, that whole discussion is so evident throughout this podcast. Anyways, I'm trying to stay focused here. So solely, so as I said, it's an investment of money in a common enterprise with profits to come solely from the efforts of others. Soly was later softened by lower courts to predominantly. But otherwise, the investment contract test has stood intact for nearly 90 years because it kind of works. We've also seen plenty of case law on this, which Lewes Cohen together with Greg Strong, Freeman Lewes, and Sarah Chen dug into literally. What they did was conduct an exhaustive review of the relevant appellate case law to understand how the Supreme Court's definition of investment contract had been developed and interpreted by federal appellate courts for nearly a century. It was an incredible undertaking. It resulted in 180 page paper called "The Intellectable Modality of Securities Laws." No one had ever done a review of that scale. Here's Lewes on his biggest takeaway from that review. So how he laws pretty clear that things that are not, you know, securities in any way that don't represent a legal relationship or legal obligation are not securities, but they can be sold in investment contract transaction. Here's a little more from Lewes on that. From a prior episode we did, episode 182 of Law of Code, where he unpacks more of their findings. You know, one of the things that the work on in "The Intellectable Modality" demonstrated is how clear it is that the how he doctrine, if you will, is a remedial doctrine. When people engage with each other in some commercial activity that how he winds up applying to, they never say this is a securities transaction. If they did, well, then you know it was a securities transaction. It purports to be something other than it is. It purports to be some sort of commercial arrangement and critically, Jacob, that's between the two parties, the party putting the money in, the party doing the stuff. And because this is a remedial doctrine, say like, "Hi, the court are going to look back at this," and impose upon parties a structure that they did not themselves. "I, then, one," say, "Me either one," said, "Hey, I'm entering a securities transaction." But, immediately, I think something was, you know, something else was going on here and remedies are a problem. Where it gets more complicated is mapping that on to what comes next. And one thing I could say with quite some confidence is, but for one case, which we do discuss in, in, in, in, in autoimmodality, but has got a very different set of facts, but for that one case, none of the cases, at least the dependent level, have ever addressed secondary transactions. That is to say, what happens if that non-security asset is transferred from person A who put in the value to person B, C, D, or E? There may have been promises or representations, and they may well not have been fulfilled. The question really is, are those subsequent and secondary transactions also securities transactions? That question that Lewis mentioned, I think is the important one here, which is, are the transactions themselves, securities transactions? If some of these tokens are found to be investment contracts and thus securities, that classification means that the spot trading of those tokens on custodial crypto exchanges turns those businesses into securities exchanges, and there's rules for securities exchanges that require registration. And that was the theory behind the securities and exchange commissions, various lawsuits of companies like Binance, Coinbase, and Crackin, among others, while other trading platforms and software providers saw investigations into their crypto activities by the securities and exchange commission. Again, for offering an unregistered securities exchange to US residents. The problem is how those exchanges were supposed to register. Even if you agreed that some of those tokens were securities, the securities exchange commission had never really provided a workable path for these exchanges to register with them. Guess what the industry had begged them to do? Exactly that. Give some way for this industry to exist. For example, Coinbase petitioned the SEC to make rules for the digital asset industry in July of 2022. That's four years ago from the time I'm recording this. And they gave reasons why the existing market rules are incompatible with this new technology. Basically saying, hey, these rules don't work. Like we want the rules to work. Let's find a way to make them work. But as written, they don't work. Now to make it even easier for regulators, Coinbase even shared a policy proposal to regulate the digital asset industry a year prior to this petition. And here they are just asking for public dialogue. They also referenced the SEC's mission. Now remember, the role of regulators is to achieve the mission for which the regulator exists. In the case of the SEC, that mission is to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation. I'd argue that none of those goals were being accomplished with the status quo or regulation by enforcement. And that's because the practical consequences of that approach was that projects went offshore, as Miles Jennings explains here. I'm really hoping that as a result of how clarity works, we end all of the random optimization for things that don't really matter. We end the legal gamesmanship that has been so prevalent over the last five years. We end the tax gamesmanship, right? People shouldn't be optimizing for tax. They shouldn't be optimizing for avoiding regulatory regimes. They should be optimizing for building things that people want. And there's a lot more in terms of second order effects. Jason Schwartz is a tax lawyer at K-Holnex. And he's talking about this from a tax angle in this next clip, but I mean, the same thing was true from a business side. So I'll let Jason explain. I mean, I think you and I have discussed before the massive hurdles that crypto projects have to overcome in order to successfully do an offshore token issue. And that doesn't just get combined with the US company from a US tax perspective and result in tax to the US company. It's a huge pain in the ass. It effectively requires the founders to give up control over their project and send the IP to a protocol sewer that is governed by a different team. And then people kind of try to play games. And frankly, that's kind of a perverse policy incentive that we're encouraging founders to move IP offshore and also give up control over their projects. Again, Americans needed a solution here. The industry needed a solution here. And that is why proposed legislation in the Clarity Act is so important. Now that you understand why we need clarity, let's talk about the bill itself about time, right? So if we zoom out, what clarity does is delineate between commodities and securities. So those two regulators we talked about earlier, the SEC and the CFTC, the most important first step to determine whether these assets are securities or commodities. And therefore what rules can apply and who the regulator is is to determine what bucket they fall into. We got guidance from the Securities and Exchange Commission on the via their token taxonomy, which was released in March of 2026. I spoke to Lewis Cohen about this on episode 182 of law of code and Joe Dole of day one law on episode 183. All you need to know for this is that the tax onomy offered invaluable clarity to builders and lawyers. But there's a reason we still need legislation. Here's Dougan Bliss. He's the head of litigation of Binance and a former SEC trial lawyer in Adembar Broncos fan, but don't hold that against him to explain what happens if we don't pass the Clarity Act and instead rely on rulemaking from agencies like the SEC and the CFTC. It's a bit of a long explanation, but it's one of the most important things that isn't being discussed anywhere. So listen closely. So first of all, what you have in the US right now is without clarity, a patchwork of state regulation first and foremost. So we can't forget about that. Some states have their own comprehensive crypto regulatory regimes they've put in place most don't. Many states allow different crypto services. So for instance, many states allow staking services to be provided by exchanges and other businesses, but some don't. So you start off with this patchwork of state regulation. And in the Clarity draft, I reviewed, you have federal preemption that takes care of that so that at a federal level, you have a comprehensive system that you're not subject to inconsistent crypto rules depending on if you drive 20 miles and cross a border of a state, right? So first of all, you're dealing with that. Second of all, I very much applaud the efforts of the SEC and the CFTC in their rulemaking. Absolutely. A step in the right direction. Very important, you know, and I'm hopeful that that it's effective. However, as a litigator in particular, I do have concerns. So first of all, rules are not as durable as statutes. Statutes are much, much more durable and the durability is a critical benefit of them. Rules can be changed. Interpretations can change. Guidance can change. And so when different administrations with different priorities come into place, you can see those changes. And it's very hard to plan a business to focus on innovation when you're worried about backsliding in terms of policy every four years, right? So first and foremost, you've just got that issue. But the litigation issue is this. Anyone paying attention to federal rulemaking in recent years has seen just a really strong climb in the number of administrative procedures act challenges to virtually any rulemaking of any significance at any agency in the country, right? This isn't just an SEC issue. This is a broad issue. And what that really means is that opponents of certain rules are almost inevitably going to file challenges, court challenges to that rulemaking. They can look for procedural imperfections or other things to attack. And so the bottom line there is there's an almost inevitable litigation morass awaiting any significant rulemaking in this country that's going to bog it down and then make statutes, you know, far preferable. But even beyond that, it's not just the anti-crypto groups where you can see litigation, right? When you look at the SEC rulemaking, a good chunk of it is based on still how we, you know, a how we analysis, where forever talking about how we, because different people with different priorities have tried to pull crypto within the securities laws using how we, and so some of that rulemaking focuses on how we and the initial sales of crypto assets that those can be investment contracts. But if you look at the details there, the rulemaking focuses on promises and reasonable expectations, which a lot of the case law from the ICO era from 2017 and in this following years did in fact focus on those a lot of district court case law focuses on it. But if you look at the crypto exchanges in the major SEC litigations over the past few years under the prior administration, one of the core arguments that was advanced was that foreign investment contract to exist, there has to be a right to the profits or other benefits from the business granted, right? An economic right promises and expectations are not enough, there has to be an economic right. Now I was one of the people advancing that argument, I believe in that argument, I think that once you look at a pellet in Supreme Court jurisprudence, you know, that argument appears strong. And I think that as those cases were on the way to the second circuit, other courts of appeal and ultimately the Supreme Court, I think there's a really good argument that that is the right interpretation of how we now I bring that up now just to point out that people could use that argument to undermine the current rulemaking that's going on and raise the question of does the current SEC as well intention as it is actually have the authority to engage in this rulemaking. And so the point of all of this is the clarity act avoids those litigation morasses and that's where my core anxiety as a litigator is in the absence of the clarity act. Yeah, we need to get these rules passed and let's talk about those rules. I know finally we're talking about the rules will specifically be talking about the Senate's 2026 version of the clarity act which Lewis Cohen shared on x at 2 a.m. on May 12th. Yes, he worked super hard to stay on top of everything. Shout out to Lewis. This version of clarity advanced through the Senate Banking Committee in mid May of 2026 just days prior to me publishing this podcast. So that meant I worked all weekend from 7 a.m. each day to get this out. Thank my amazing wife for putting up with me and believing in this podcast as well as the lawyers and policy folks who took time out of their work days to help make this podcast possible. These people care. So the best way to thank them is by sharing this podcast and helping us spread the word about what's actually happening here. So as I said, when I refer to clarity act, I'm talking about the 2026 Senate version. If a new version comes out, I'll redo this podcast to resolve any confusion around what versions we're talking about. The primary goal of clarity is to resolve confusion around whether a token is a security or commodity through a multi-tier classification framework. Now, there are nine main titles or parts to the clarity act. Title one is about responsible securities innovation. That covers the rules relating to insular assets and network tokens and the definitions and sort of that dynamic between commodities and securities. We'll explain that next. Title two is about protecting against elicit finance, covering things like the Bank Secrecy Act and sanctions laws. Again, this is no free pass for the industry and anyone telling you otherwise is frankly lazy and hasn't read this. Title three is about responsible innovation in decentralized finance. Title four is about banking specifically about how banks can interact with digital assets. Title five is about regulator innovations. Title six is about protecting software developers and that includes the blockchain regulatory certainty act. To better understand that, I didn't episode on that with the leading authorities for episode 200 of law of code. I'll put a link in the show notes below. The final few titles are title seven eight nine. Those are about protecting consumer property, customer protection, and other matters sort of in that order. This podcast mainly covers the first three parts. Title one to title three. Let's start with title one. Title one is basically the RFIA. Remember, that's the LUMMIS, Gillibrand, Responsible Financial Innovation Act that began back in 2022. Only this is a version. Section 102 of clarity amends the Securities Act of 1933 to categorize two types of digital commodities. Incillary assets, which is the first definition listed and network tokens, the seventh definition in that list. Network tokens and incillary assets are what we're going to spend the bulk of the next few minutes discussing. This is sort of the core of this bill. A network token looks more like a commodity andcillary assets a bit of a hybrid between a security and commodity. If a token appears to be a network token but has some economic right, termed in this case a disqualifying financial right, there's a bunch of these disqualifying rights listed in section 102, subsection seven in the definitions list under network tokens, which including any debt or equity interest, then it cannot be a network token. And I think what's really important to understand here is that you can have some benefit to these network tokens, to these incillary assets without importing the entire existing securities leveraging. And that's a key distinction I want to touch on here that a digital commodity is not disqualified from being a network token. If it grants economic interests or voting capabilities with respect to the distributed ledger system or its decentralized governance system, otherwise we would be disincentivizing any financial innovation here. I'll let Sarah Brennan explain that here. I think the one and very important thing this bill does, which we got into the house version it's here as well is they're distinguishing between an economic right, which is like a contract right, I think this version updated this language to further distinguish an economic interest. An economic interest is not necessarily disqualifying. That means that you can have value accrual to the token across these models, which is super important to these tokens not being junk. So it is a step forward from what we've been seeing. If you'll note there is a next press fiduciary duty provision that says basically nothing in this bill alters the fiduciary duties the entity has to its shareholders. So there is an express acknowledgement and structurally kind of keeping this tension between shareholders as a superior class and token holders as a junior class because they would have to be built into state law in the mix of things what's owed to them. And so again this interest versus right it's not a right it's not a contract right that makes it security it's just an interest and how we design from here is going to be very open sort of regulatory and economic incentives for token holders, but it's a start right. It lays out the landscape, which I think we've been in it for a while we know what happens when it's not laid out. So like I'm excited for sort of that next era of you have to say what it is and stand behind it. I'm very excited for it too Sarah and this is a really really important part of the entire statute. So please just listen closely to this point. As I said under clarity network tokens are able to provide some benefit to their holders without being considered a security. We need to head to section 105 and clarity to understand how this works. So under clarity the Securities and Exchange Commission has one year to draft and adopt rules that spell out how this works and I'll be in Washington to interview people at the Securities Exchange Commission to talk about that. But what really you need to know here is that clarity provides a framework through section 105A for network tokens to provide some benefit to their holders. Section 105A explains that a network token will not be considered to have a disqualifying financial right. This concept of a disqualifying financial right is the bill's way of saying that the value flowing from the network is different from any value flowing from a company or a promoter behind that network. And section 105 lists for specific circumstances that fall into that safe zone where the token can offer some benefit without its issuer being considered to be issuing a security. First, where the distributed ledger systems, I'll just call them blockchains, collect, receive a crew or distribute consideration themselves. So these are things like transaction fees that flow back to token holders through the protocol. Second, where the token provides governance capabilities with respect to the blockchain or its governance system. So this protects governance tokens explicitly. Third, remember these are the four circumstances where the token is in the safe zone. It's not going to be considered a security. Third, where the token's value may appreciate or depreciate so it could change due to the use of or in response to the efforts, operations or financial performance of the blockchain or the decentralized governance system. And fourth, and this is notable for tokens that meet the definition of ancillary asset, which we're going to get to, where the value appreciates or depreciates depending on the efforts of the ancillary asset, originator or a related person. So that means that even if there is a dependence on a founding team, there is not automatically a disqualifying financial right that would transform that network token into a security. Okay, so TLDR, those four points basically say that network tokens that this this first category of tokens can offer some economic benefit to their holders within reason and depending on where that benefit is coming from. So at the risk of repeating myself, I just think because this is so important here, there's two buckets for what a digital commodity can be under clarity, at least for our purposes here. It can be a network token or an ancillary asset. And the easiest way to understand it is by going through clarity. So let's explain step by step here. A network token is a digital asset that is intrinsically linked or tied to a distributed ledger system and does not confer those disqualifying financial rights, meaning it doesn't look like equity, debt or any sort of profit sharing arrangement. If a token clears that bar, meaning it is a network token, it is treated as a digital commodity, not a security. That means CFTC jurisdiction applies and secondary market transactions in that asset are not securities transactions. This is where tokens like Bitcoin will sit. As Sarah Brennan of Delphi Digital will now explain, there are also incillary assets and I thought her framing here was good. I guess I would describe ancillary assets as they're either like immature network tokens or they stay that way, but they are sort of not what you would deem to be a traditional security. But it's got that dependence on the efforts of the team kind of flavor to it. As Sarah said, there's sort of a different flavor to ancillary assets and the drafters of this text wisely recognize the reality of the situation here and that is that there needs to be some middle ground between a network token, basically a token on a network in its final uncontrollable form and a security and that's where ancillary asset sort of bridge that gap. And to me, it's one of the most interesting parts of this entire text because rather than start from scratch like drafters of the European Union did with their version of digital asset market structure legislation, Mika, the clarity act followed principles from existing law when proposing this ancillary assets test. Here's a quick five minute back and forth that I had with Lewis Cohen to explain this concept further. We had the opportunity to see another major framework with the European framework markets in crypto asset regulation, Mika. And that sort of went in a different direction of just said, okay, we're just going to take everything and make a completely new regulatory framework. And while that has pluses, I think as Mika has shown, it also has some significant drawbacks. So if you take your starting point of saying we don't want to do that, we want to work within our existing securities and commodities framework, how do we best solve that? And I think that's really what the answer is a framework of particular clarity in general are trying to address. And we're kind of going back to the route, how we law. And that's what it says. We could disturb how we could say, it was kind of messed up. And as you know, Jacob, there folks out there who said, look, while we're taking a pen to this, let's just rewrite how we, and Congress has the ability to do that. Personally, I think the juice to do that isn't worth the squeeze and the complexity of having to refigure that. But yeah, we're at the end of the day, we're going back to basic principles of law. Yeah. And I think one thing that is lifted from how he that is very wise and is in how we for a reason. And there's a reason how he lasted so long, right? And that is the entrepreneurial or managerial efforts. It's almost verbatim from how we went to finding when a network token becomes an ancillary asset. I shouldn't even say becomes, but when it is an ancillary asset because it would go from ancillary to network token, not sort of the other way around usually. So it uses the same language to define when it stops being one. A lot of people say, well, you know, there's ambiguity with how we and are we just importing the ambiguity here by keeping these tests around? Yeah. And I think to some extent, we are, but the question is what ambiguity and who bears that ambiguity? I think Jacob, the fact of the matter is that as the courts remind us, you know, constantly and the SEC has reminded us a lot that the world of investment fraud is wide, broad, and deep. And the reason some of this is vague is because it really depends on specific facts and circumstances. And people will do everything they can to work around fixed rules. And so having something that has some principles basis and open ended, I think is does important work for protecting people. However, then that leads over the question, okay, so it's not not a bright line test. And again, as I said, Jacob, I don't think it should be. But if it's not, who bears that risk? How do we manage that? And I think that's where this version of the clarity act really gets it right. And earlier versions have struggled just a little bit. And I can say more about that. - What is it about this act that gets it right that might have been missing in prior versions? - Yeah, so it's really the connected tissue between something that itself would be recognized as a non-security. And you pick it up, you look at it with this thing over here, right? It's thatchen chillas, you know, or whatever it may be, whatever it is, ain't a security. But you know, it may have been offered and sold in an investment contract transaction. I think the current SEC has done an amazing job of the most importantly, looking at how we, and maybe just a T9C bit looking at an ineluctable modality too. And reaching that conclusion, what the SEC is missing is a tool in its toolbox that clarity adds, which is okay. So something that's not a security is sold in a securities transaction. What happens next? What happens next? How a case law really does not address the what happens next? And that's because as a practical matter, whether it was the chinchillas or the oranges, the myriad other app, there really weren't secondary markets in these things. The whiskey, of course, one of my favorites there. There were no secondary markets. And so the case law never adds sort of that question, what happens next? It was hard for the SEC to go beyond that and take a position. And I think the March guidance, which we've talked about, I think, previously, does a good job of trying to sort of say, well, hang on a second. If there's promises that are continuing, if there's entrepreneurial efforts that are continuing, feels weird just to let the person who raised the money wholly off the hook. And I'd agree with that. However, putting third parties in jeopardy who are unable to determine when those promises and representations and really is not the right policy result. It's the best you can kind of do until Congress acts. But now Congress can act, and I believe, will soon enough be acting. And what it will do is say, look, the right person or entity to bear those ambiguities, right, where we started this little theme here, what about the imiguities, the right person to bear the risk of the app of those ambiguities is the entity or person that raised the money. They got the benefit of the deal. Hey, give me some money. I'm going to give you something that's not a security. But watch what I do. I'm going to make that thing much more valuable. Fair enough. Go to it, right? But now you bear some responsibility. And what makes clarity so different is it now portions that responsibility on the person who raised the money by saying, look, you've got important disclosure and anti-fraud obligations that apply to you. And I think that's the right way of finding a balance and of that ambiguity issue that you raised. As Lewis said, this is a good balance. And these digital assets are novels. So we do need to think of creative rules to capture them and then to make a fair system. So everyone understands what rules apply. Let's talk about that framework, though, right? Like now we understand, OK, there's these two buckets. But how does the insulary asset framework operate under clarity? Many tokens start their life looking more like securities than they do commodities, right? There's a founding team doing all the work. And the token's value is clearly dependent on that founding team, on those efforts, before maturing into something that looks more like a commodity. Here's Lewis again. It's recognized by the statute rafters that in many cases, enough cases, a project team that launches a network token actually is continuing to do important work. That probably is driving things forward. There's probably some reliance on them. And there are a wide variety of ways that project teams can enhance the value of their tokens. And of course, their interests are aligned. They typically hold a lot of tokens. That entrepreneurial and managerial effort, if it's present, would make that token be treated as-- I wouldn't say it becomes an answer, I guess. It's just treated in a different way. And it's treated in a way where, as we said a few moments ago, apportions, disclosure obligations on that team. Now that seems, again, like a fair balancing. Look, you raise money, you solve these network tokens, you continue to provide important efforts that drive it, tell the world under penalty of anti-fraud rules what you're doing. The ancillary asset-- here's the critical point, right? The ancillary asset, still not security. Still not a security. And I think that is really one of the core takeaways. As Lewis mentions there, the ancillary asset category offers a solution in the form of a disclosure regime for this transitional period for assets that are hoping to be network tokens. And we'll get to that disclosure regime in a second. But first, we need to unpack what an ancillary asset is exactly. As Lewis explained and Sarah alluded, the ancillary asset test starts by looking at whether the asset is an network token. Could it be a digital commodity? Meaning, is it a digital asset that is intrinsically linked to a distributed ledger system and lacks disqualifying financial rights like profit sharing? Once it clears that threshold-- so once we know it's a network token, then you look at whom the value of the network token depends on. If it's market forces, like in the case of Bitcoin, it remains a network token. If the value depends on the entrepreneurial or managerial efforts of others, which is a nod to the how we test, then the asset is an ancillary asset and subject to the rules outlined in clarity, those disclosure rules. Now, when we talk about the efforts of others, the managerial efforts, that's a really important point, because network tokens had and have various promoters, like Bitcoin people like Satoshi Nakamoto, Hal Finney, Adam Beck, Michael Sayler, et cetera. These are promoters, but are these the promoters we're talking about here? Thankfully, clarity offers some-- wait for it-- clarity here. Recall the statute, quote, "The term ancillary asset means a network token, the value of which is dependent upon the entrepreneurial or managerial efforts of an ancillary asset originator or a related person, as those concepts are further specified by the commission by regulation." So more is going to come from the commission, but this is from section 102, this definition of an ancillary asset. And I think there's two key points there that we need to unpack, which is the efforts of an ancillary asset originator or a related person. What's an originator and what's a related person? Those are the two buckets that we need to understand next. An ancillary asset originator is defined as the person who originally offered sold or distributed the network token or caused it to be offered sold or distributed. So practically speaking, this means the founding team, the company, the foundation, whoever launched the thing. Here's Lewis on his biggest takeaway from that. One I was just going to quickly call out, which is a difference between this clarity act and the clarity act that was passed by the house last summer in that it does not use the term issuer. And this is a personal hobby, personal mind, but I think it's really a core point to really understand securities have issuer, sure in any kind of legal sets. They are an originator. And if they take back a bunch of the tokens, they can and probably should have legal responsibility. But they don't have the same kind of responsibility that a securities issuer has. And I think it's important to understand why the Senate Banking Committee chose not to use the term issuer here and instead go for, I think, a much more appropriate term here, which is originator. And the May draft added joint and several liability language here, meaning that if the original offer transferred the largest allocation of tokens to another person or entity, the recipient, even though you didn't issue them yourselves, you can get pulled in as a co-originator. And that's kind of a smart measure, right? Because you don't want people just to be able to escape the status by transferring things between offshore vehicles, for example, having a BVI company do the actual issuance and then transfer it immediately to a third party. Related person is an interesting point as well. Remember, this is one of those two buckets that is captured in that efforts of others prong of the Incelerary Asset Test. It's defined broadly. And it includes basically a sliding scale of persons and captures their activity at varying lengths. So related persons can include any founder or person serving in a similar capacity, who within the proceeding three years-- so 36 months-- was also a beneficial owner of at least 4%. 4%. That's not much of the total outstanding units of the associated Incelerary Asset. So really, this wants to really grip the founding teams closely here. And so the bar is a little lower for the company behind it. Any current or recent-- so in the proceeding 12 months, executive officer, director, trustee, general partner, or holder of more than 10% of any class of equity shares of the Incelerary Asset originator. Then you have any person or group under coordinated control that beneficially owned 10 or more percent of any of the outstanding units of the Incelerary Asset at any point in the prior six months. And I'll have more on coordinated control below. Then the last part of what constitutes a related person is any person or group under coordinated control. Again, I'll explain that below. That beneficially owns covered tokens equal to at least 2% of total outstanding units of the Incelerary Asset. Again, looking back in the prior six months. So you have three years for founders, 12 months for people who are more on the equity side, on the business side. And then you have six months for groups or persons under coordinated control that own above a certain threshold of those assets. As Lewis Cohen is about to explain, these lock up style provisions are another way that clarity imports principles that work. in existing securities law. That really comes at a different angle for the same problem, which is we've always struggled, well, always, since the birth of tokens and the earliest token sales. We've struggled with how do we think about these token sales? Many of them probably fit the how we fax and probably are investment contract transactions. Hey, I'm just starting up something cool and new, Jacob. How'd you like to buy 5% of the tokens and be part of this thing? You know, I think we'll all make a lot of money. Probably investment contract transactions, especially if it's either not fully built or not really deployed and operational. But we didn't have any way of addressing it. They're really worth as a practical matter, no registered offerings. And that was very cumbersome and expensive. And of course, the private placements that we did have were limited to accredited investors, angels, and venture funds. We didn't really have a way of doing what blockchain does best, which is crowdfunding, allowing the people who best understand what this project is about to contribute. And going all the way back, gosh, probably four years ago, right, Jacob? Hester Perst, the commissioner, proposed a way of doing that, a safe harbor for fundraising. And I think it was a better part of four years ago. I'm going to say, you know, our fact checkers will fall. Yeah, I'm looking at it. I'm looking at it pretty soon. 2021, yeah, that was 2.0. So I think the first time, maybe you can figure it out. 2020. So six years ago, Lewis. Six years ago, right, you know, we've been trying to solve this problem. And again, hopefully, hopefully, clarity, pass as it becomes law. And it will address that with the 301 system, right? And so that allows in a very practical way, token projects to fund rays with pretty light touch guidelines. But everything has to have a balance. And the balance, which I think makes a ton of sense, is to say, well, look, if we're going to let project raise money, what we don't want to see is the, you know, for lack of a better term, right, pumping and dumping. And that is out there's really easy to create some hype, sell something that's basically just a little magic ticket, jelly bean, you know, nothing yet, get money in and just walk away. And so the idea here is to compliment the safe harbor that Commissioner Perst championed six years ago, compliment that with provisions that create meaningful, economic incentives for the people who are launching the platform to stick with it and have an economic skin in the game. They can always walk away, nobody's bound to it. But, you know, if they want the economic upside, they're going to have to deliver on it. And look, there's a lot of ways of skinning that cat. And if you look back, there were provisions not only in the January text, but in the earlier September text that was unofficially circulated by the banking committee. All of them were a little bit different from each other. Those and cons with each of them. I think the committee settled on something that makes a lot of sense for now. But the principle is one that's core, which is if you get the benefit of a fast track way of crowdfunding token project, the consequence is you're going to have to stay holding those assets until you achieve some important, fungcially decentralization hurdles. Okay, so now we've got a pretty good, pretty comprehensive look. If I do say so myself, at the two main types of tokens and how involved parties are treated and categorized. So it can either be a network token without a third party promoter upon whom the value is dependent or a network token that relies on a third party for its value to accrue. And that's the Enceleria set test. Another key point that I'm not really going to touch on too much is tokenized securities. So projects that are in either the traditional financial sector or in crypto can't use this as a way to issue securities by bypassing existing securities laws. And that's covered in section 505 tokenization of securities, which explains that a security does not seize to be a security solely because it uses a blockchain. And it adds that, yes, existing rules apply to tokenized securities. And they say that a study is going to be conducted to figure out how to best regulate that. But basically, this is another example of why so many people who say that this is a free pass for the industry like, don't really do the work to understand what's happening here. And you do, because you're listening to this. So thank you. Let's just do a quick recap before we move on. Because I think there's so many more interesting points to cover. There's basically these three buckets of digital commodities, which are kind of on a spectrum of decentralization or control. The most decentralized, meaning the least control any one group can exercise over the value are network tokens. Then you have Enceleria sets with more control and more risk of manipulation, then network tokens. And then at the third sort of prong, I'll say you have security tokens where the value is dependent on the team. And there's some legal economic right that disqualifies the token from being a network token. I'll let Miles Jennings of A16Z give a quick recap before we get into how the regulations actually work and what happens once these assets are defined. But within digital commodities, the way to think about it is, OK, you have a subcategory in digital commodities that is network tokens. So that's any token right that is intrinsically linked to a distributed ledger system to blockchain, right? And that drives is deriving its value from that blockchain. So that's everything from Bitcoin, Ethereum, Uniswap, hyperliquid. All of those tokens are network tokens that are deriving their value from an underlying blockchain system. Clarity treats all of those as digital commodities. So they're all in that bucket and regulated as digital commodities. Then within that category of network tokens, there is a subset of assets called Anceleria sets. And those are basically network tokens that fall within Clarity's regulatory framework. So those are any assets where there are, even though they are commodities, there's still some potential risk of information asymmetries that kind of warns a regulatory framework, applying to them. So Bitcoin is a network token, is a digital commodity, but isn't an Anceleria asset because it's not really dependent on anyone's efforts. What's so ever? It's basically done. It's been done for a long time. There is no one out there who's driving the value of that asset. There's no one who's out there who where the value of Bitcoin is dependent on that person's ongoing efforts, right? And which is a standard that's that's kind of coming from how he, right? But in Clarity, what it basically does is it moves that standard way lower and makes it much less gameable, right? So basically, so look, wherever you have a digital asset, where you have network token, where a team is continuing to work on it and build on that system, right? We're going to treat it as an Anceleria asset because the nature of the fact that someone is continuing to engage in ongoing efforts means that there is potential risk of information asymmetries with respect to that asset because the person that is working on it, who's building it, who's driving it, right, or maybe not driving it, but maybe having some Anceleria effect on its influence and its price and its growth, right? That person is going to have information asymmetry as compared to the general market. So the idea is that where you do have network tokens that do have a team behind them that they're working on them, like those assets now fall into that regulatory perimeter. That because that threshold is lower than it was in how he write it, I think it's nominal efforts in Clarity as compared to just efforts under how he, that means that the vast vast majority of network token, basically anyone where there's still a startup that is kind of building that system, right, is going to fall within that regulatory perimeter. And as I was saying earlier, that's exactly what we want because we want a very level playing field, everyone competing within the same regulatory framework. And because we've now established a framework that basically applies to all network tokens, it means all of these systems are going to compete against one each other on a level playing field. Okay, so we've got these different types of tokens. Obviously the next question is, how are they regulated? Once they've been categorized, what comes next? Network tokens will be regulated by the CFTC as digital commodities, which closes the gap that existed prior around spot markets for digital assets. Remember, they could regulate the derivatives ones, but not the actual market themselves. And therefore any exchanges that were trading these assets weren't really under their purview. And that was fine because things like Bitcoin didn't need a regulator, but in exchange that trades and custody's Bitcoin should and does need a regulator, see quadriga, Mt. Gox, FTX, etc. For reasons why we need some sort of regulator here. So now in exchange listing these network tokens with register and be regulated by the CFTC, not the securities exchange commission. And secondary market trading and network tokens is not going to be considered a securities transaction. So certain rules like lockups that apply to securities into and salary assets do not apply here. Whereas the offer sale or distribution of in salary assets when made by an originator shall be considered a distribution of an investment contract for securities law purposes. So if a token has fully cleared that incillary asset test that threshold and is just a plain network token, meaning the originator has either certified out or never triggered the incillary asset condition in the first place, the disclosure obligations that I'm going to talk about in a brief second here do not apply to the network token. And that's huge because disclosures are expensive. They're ongoing. They're accompanied by host of liability and related risks. The good thing is that this incentivizes companies to look more like networks than businesses, which is kind of the entire point of a lot of the blockchain focus projects anyways. Miles Jennings of A16z explains that concept very well here. Yeah, so I mean, if you if you look at it right, all of the networks that we have almost in the world outside of like the worldwide web email things like that are actually companies. So in Chris Dixon's rewrite own book, he talks about these as being corporate networks. And as a result of our entire regulatory framework from securities laws to corporate law, everything basically assumes that there is a company at the middle that controls and that that control persists over time. When you apply that to building networks, right, what it means is that those networks end up being controlled by a centralized company. And that means that those companies as they build network effects, right, and grow these networks like a Facebook, like an Uber, all of these things, an incredible amount of power accrues to that company at the middle rather than to the people. that are actually using that network and the ones that make it valuable. I'll change, allow you to remove the company from that and have a network that is fully autonomous on its own. And as a result of that, no one controls it. And so you can imagine it a world where, if you had a Uber network, right, that a lot more of that value would be able to accrue to the participants that are actually doing the work that make that network valuable as opposed to the centralized person that's controlling it. Now, that is just the rules pertaining to network tokens. And really, like I said, there aren't too many there. Because users don't face the same risks as in Celeriazzi, but there is going to be regulation for them, particularly where the risks are, which is custodial exchanges that offer buying and selling of these tokens. Important to note though, that those are exchange level obligations on the intermediaries, the middlemen, not issuer level obligations on the network token projects or its founders. The risks of in Celeriazzi, I remember these are assets where there's a bit more of the alliance on the team are different. And therefore, so are the rules. Like I said, think of in Celeriazzi as a sort of hybrid thing. The asset itself is a digital commodity in network tokens. So the CFTC jurisdiction would apply to that underlying token. But the transactions involving the originator and related persons are treated almost like investment contract transactions. But the asset itself does not become a security under clarity. That puts those specific sales under the SEC's jurisdiction in the Securities Act disclosure framework. What the SEC does is they ask these in Celeriazzi issuers or originators, I should say, and related parties to file ongoing disclosures through section 102 of the clarity act, which inserts the new section 4B into the Securities Act of 1933. The disclosure obligation specifically live in section 4BC and 4BD of the amended Securities Act. Section 4BC sets out the triggering events. And this is when an EnCeleriazzi at originator would become subject to the initial and periodic disclosure requirements upon any of the four following things. First, it's filing an offering statement under regulation A's or two, conducting an offering under the crowdfunding exemption. There's also making the first secondary market offer, sale, or distribution of an EnCeleriazzi in the United States after the clarity acts effective date that would constitute a public offering. So even if you haven't done the first two, if you do this third thing, you're still going to be sort of required to make these disclosures or conducting an offering under regulation crypto, which is the new exemption that the bill creates in section 103. Regulation crypto, cool name, right? As I said, this is a new exemption from Securities Registration created by section 103 of the Clarity Act. It's the bill's purpose built on ramp for token projects to raise capital from the public without going through a full SEC registration process. The name regulation crypto is a deliberate parallel to existing exemptions in securities laws. You have regulation A, which allows smaller companies to raise up to a certain amount of-- from the public through a streamlined offering process, you have regulation D, which covers private placements to accredited investors. Regulation crypto is a cousin of that. It's designed to do something similar, but specifically tailored to the reality's token fundraising, which, as Lewis Cohen has noted, has never really fit neatly into those existing frameworks. The core function of regulation crypto is to allow an ancillary asset originator to offer and sell incitillary assets to the public, including retail investors without registering the offering as a full securities offering, provided that they comply with the conditions that the SEC sets by rule. Those conditions, like a lot of it in this statute, are not fully specified here. But the framework is there. You comply with regulation crypto and file the required disclosures under section 4BD. And suddenly, you have a path to lawful public token fundraising in the United States. You get the benefits here, but you also take on the burden, which are the transparency obligations that come along. As I said, those are covered in section 4BD. And what Clarity did was sort of punt rule making here to the SEC to adopt specific disclosure requirements. And those rules must be reasonably tailored based upon certain factors that include things like the aggregate amount of incitillary assets that are offered or sold to the public in the United States, and whether the applicable incitillary asset in its distributed ledger system is subject to coordinated control. So how much are you raising? And how much control can these third parties or can these entities exercise over the ledger or the network that you're purporting to create? Now, coordinated control is an important point. And that's something I said I'd revisit. And I'm a man of my word. We're going to talk about that now. Because previous versions of Clarity actually use the term common control. It was only switched to coordinated control in this May Senate draft. Common control is a familiar concept in corporate law, which basically means two entities are controlled by the same person or parent. Here's Sarah Brennan to explain more about that change. There are discussions around traditional common control and reporting and how far you draw that out in the bill. And so I think not having been in the discussions, it's like we're going to use the normal term for what we normally conceptualize this as. And we're going to create a new definition that picks up all of these sort of broader relationships that happen in this ecosystem. And that's exactly what this coordinated control definition does. The bill renamed it from common to coordinated control to better capture the crypto context where formal ownership structures may not exist, but people can still act in concert to effectively control a network or token supply. The precise definition of coordinated control is left to the SEC rulemaking under section 104, though some guiding considerations are given on page 87 of the May Senate text, such as whether it is an open digital system, permissionless, and incredibly neutral, distributed, autonomous, and economically independent. OK, so that was a quick aside about coordinated control. I want to get back to the disclosure rules now. As I was saying, the Security Exchange Commission is going to give us some specifics here. And I'm going to Washington to talk to them in person, so stay tuned for that podcast on that. The important thing to note is how these disclosures work. They're going to be filed with the Security Exchange Commission in whatever form they prescribe. But when are they going to be filed? The involved parties are required to file disclosures before any triggering offer or sale and semi-annually after, which means the timing here works in two phases. First, before anything happens, so before you do your initial sale, distribution, offer, et cetera, before any secondary market public offering, the originator has to have their disclosures filed in current. You cannot sell first and disclose later. And everyone who's considering doing some token launch should be aware of that now. Secondly, once that initial disclosure is filed, the obligation becomes semi-annual, meaning twice a year going forward, for as long as the incillary asset regime applies. So every six months, the originator has to update the SEC with current information across all the categories listed in Section 4D, that is, financials, personnel, activities undertaken and projected, token holdings, insider transactions, development timelines, et cetera. Honestly, all important things that every project should be disclosed. Now, the next question is, how do we draw the line for what needs to be disclosed? And they take a great approach here, too. The information that must be disclosed must be material and known or reasonably knowable to the originator or the digital asset intermediary filing on their behalf. Yes, exchanges can file on behalf of tokens, which will be a really interesting future and dynamic that we'll talk about more in the future. Let's talk about what's material, because that's an important point. Like, if you're going to think about what you're disclosing, what reaches the bar where investors, regulators, should know about it. The bill itself organizes the disclosure requirements into subparagraph A and subparagraph B with different headings and different treatment. These begin on page 45 of the Senate draft, if you want to follow along under the Section D specified initial and periodic disclosure requirements. And reminder, these are for the insular assets. Category A includes basic corporate information about the originator. And this is mandatory, as the text says, that they shall furnish the SEC with this information. And that information can include the originator's experience in developing insular assets, in experience with distributed ledger systems and technology. So that's Category A, which is mandatory. Category B is more discretionary items, again, a subject to SEC rulemaking, as clarity says, that the SEC may include these items. And that is economic and technical information about the insular assets, such as the amount of the assets that are owned by the originator themselves, a plain English description of how to distribute ledger functions or similar things. Category A and Category B aren't the only ones, however. There's also Category C, which is catch all that requires the originator or intermediary to provide any information that might be material that wasn't disclosed under Category A or B. So this is a catch all for the regulators to say, hey, if there's something really important that happens and that you didn't disclose here, you're going to be in trouble for that, as you should be. So we've got these three categories. Category A, Category B, and Category C that are made on an ongoing kind of semi-allennial basis, starting from before the first offering. These disclosures must continue until when, right? Like, okay, you're an insular asset. Are you an insular asset forever? No. These disclosures continue and you're an insular asset until a certification process terminates the obligation or the SEC issues in order to deny and suspending or revoking your certification. What is that certification process? You're probably wondering what that is and how it works. My thoughts exactly, no wonder we get along. Anyways, this certification process is the exit door. It's basically a formal process to grow. graduate from in-cillary asset status and the disclosure regime that comes alongside it to a network token without sort of that securities law overlaid. Here are five things you should know about the certification process in the Clarity Act, which again is when an in-cillary asset would become a network token and lose the securities law overlay that is expensive and does have compliance requirements and risks. First, who can file it? Who can file the certification to go from in-cillary asset to network token? The bill states that a certification covered party can submit a certification. That term is defined in section 4 BA3 and captures four categories. That can be the in-cillary asset originator itself, a subsidiary of the originator, a related person of the originator, or any entity that directly or indirectly controls or is controlled by a common entity with the originator. So basically, if you're super involved, I think that's a good way to summarize it. If you're super involved, maybe you're not the direct issuer or the originator, but you're super involved, you can submit that certification. The May draft also added the ability for a digital asset intermediary, so I think an exchange list in a token, to file on the originator's behalf in certain circumstances this certification. What does the certification contain? What are you going to say to the regulator when you're filing this? There are two substantive components and each must be based on knowledge and supported by reasonable evidence. The first is that during the 180-day period preceding the submission date, prior drafts had one year, but this is shortened to 180 days. And as of the date of submission, you must certify that no certification covered party. So remember, those related persons has engaged in more than nominal entrepreneurial or managerial efforts with respect to the ancillary asset or the distributed ledger system it relates to. And no certification covered party is likely to engage in those efforts following the date of certification. A bit of a mothful, but what the bill does really well is it lowers the bar from how he's efforts prong to quote more than nominal efforts, meaning some minimal involvement going forward does not automatically block certification. The question obviously then becomes what constitutes nominal and that's left to the SEC rulemaking under section 104 and that's something that I'm going to talk to them about when I go to Washington. The second thing that this certification process needs or this application needs is that all material information. So any information that matters that is reasonably expected to contribute to the value of the ancillary assets is reasonably expected to remain and already is publicly available. So the idea here makes sense, right? You don't want information asymmetry, which is what the entire swath of securities laws were created to prevent. So long as there is not this information asymmetry, you can certify. And this prong is saying that if the market has access to everything that matters in terms of information when it comes to value in this token, then hey, you're no longer an ancillary asset. There is no third prong. So those are sort of the main two prongs. But as part of this certification, it's important to note that any material misstatement or omission, so if you lie, if you make a mistake, that's really important, that becomes effective. If your certification passes, the SEC can revoke the certification, they can deny it or they can suspend it and they can pursue enforcement action against you. There are other consequences for failing to make material disclosures, including the delisting of the token from exchanges. Okay, so now we have, you know, who can file it? What the filing contains? The question now becomes what happens after filing? So after you file your certification application with the Secure Names Exchange Commission, they have 20 business days to notify you or the originator of its intent to deny the certification. That's an important point. I want to unpack that quickly because what's really happening here is a few things. First, the SEC actually can't delegate this decision to staff or an individual commissioner. The vote to deny an application to certify has to come from a full commission, meaning the five commissioners of the SEC must vote on this. And there are two practical implications of that. First, it creates a higher institutional burden for denial because it takes commission meeting time and requires five political appointees to go on record with why they're denying this application. Second, it creates accountability and transparency. Hallmarks of any good rule as a full commission vote is a public act. It produces a public record and is much harder to do that quietly or arbitrarily than a staff level decision. If the SEC does not deny the application within that 20 business day review period, the certification is automatically deemed approved. From that point on, the disclosure obligations terminate and the token is treated as a network token going forward. That's great, right? Like if the SEC is super busy and they see it and they say, okay, we've done our analysis, it's okay. They don't need to have some long list of reasons why there's a presumption that these will be approved. And so they're going to need a lot of staff probably to go through all this, but these are really important things. And I think the principle is behind them makes sense. Now, this isn't just a ghetto to jail free card that you can use all the time. If you've graduated from ancillary asset, now you've got a network token, what if the status of the token changes? Well, the certification is not permanent. If after certification becomes effective, any certification covered party, as I said before, someone super involved engages in those entrepreneurial or managerial efforts that would render them unable to meet the certification standards, the certification is no longer effective as of that date. The party undertaking those efforts then becomes responsible for recommencing the disclosure obligations, including a description of the change in circumstances. This is great. This is so great, right? Because what it's saying is like, okay, now there's incentives for people to upgrade their projects. Like say quantum computing begins breaking things. We want these people to jump back and say, hey, wait a second, you know, just so you know, Security Exchange Commission, it wasn't network token. We're kind of doing something to change the way it works to make it safer for everyone. This is a huge boom to all the users, huge boom to all the Americans, huge boom to anyone who's really involved in this space. We want people to be able to upgrade these things. And that's what this post certification, recertification does. One last point, a project can submit a certification before it even launches a public offering. So that gives you preclearance on your decentralization status from day one, rather than having to operate under the Encelerary Asset Regime and certify out later. That's new in the May draft and obviously significant for builders to keep in mind as they're thinking through their projects. Okay. Dang. That was that was a lot of heavy stuff, but I appreciate you bearing with me. You made it through the bulk of the token classification. If the bill passes exactly as written at this stage, which we all know it won't, but if it does, a lot of what comes next is rulemaking from agencies like the SEC and the CFTC. But it also means that listening to this podcast really has you up to speed. Now just thinking on the topic of those disclosure rules, the SEC has one year to adopt disclosure rules. They also have to define coordinated control, what constitutes as nominal efforts. There's this joint SEC and CFTC framework for intermediary disclosure substitution. The regulation crypto exemption is going to get defined by rule. The bill is basically a framework and the agencies are going to fill in all the gaps. And that's why I'm heading to Washington to talk through all this with the securities and exchange commission, a recording in person at their headquarters with SEC commissioner has to purse and tailor lineman chief counsel of the SEC's crypto task force. The only reason I'm saying this and we're not done the podcast yet, but I'm just saying this because if you have questions, you want me to cover leave comments on this episode on social platforms or message me on X or on LinkedIn at Jacob Robinson JD. Obviously, I have no way of thinking through everything. You might be thinking. So if you do have good questions for me to ask them, please let me know because I want to make sure we get the most of that conversation. Now if you are still with me and if you're listening to this, I mean, you have to still be with me, but maybe you're driving or you're working out and you can't touch your phone so I can just keep talking. And I do know your driver your work out is going to end at some point. But anyways, don't touch your phone. Stick with me. There's a few more things that you need to know about clarity and it's only going to take a few more minutes. But what we're going to cover is the stable stablecoin yield compromise. We're going to talk about the ethics provision and the legislative path forward as well as a really important tax consideration that no one's really talking about. Before we get into those details, here's Kyle Bleijin from the decentralization research center to explain what still needs to happen before any of this can become law. And Kyle is in Washington. He spent a lot of time working on this bill. So he's a good person to explain that. Yeah. So we just passed through a markup in the Senate banking committee bipartisan two members of the Bush, Guyago, and also Brooks, join their Republican colleagues. We've already gotten through an agricultural markup as well. Unfortunately, that was partisan, but we will probably make sure there's a bipartisan package going to the floor. So after this, a few things need to happen. So there needs to be a committee report on the bill to bring out of the banking committee. And then we need Senate leadership to actually schedule this bill to go to the floor. So we need to have a floor time. But then there's going to be this amazing Senate process called rule 14 where they have to bring the banking committee draft with the agricultural committee draft and join them because it's the, we need the comprehensive market structure package. So we need the regulation provided by the AgTex and the regulation provided by the Senate banking committee tax. And that's going to provide the comprehensive market structure that we need. Now I alluded to this earlier in the podcast and you might have been wondering why there are two versions of clarity. Why are there agriculture and banking committee drafts? Why are there separate drafts for this one piece of digital asset legislation? Here's a snippet from episode 174 of law of code where Bill senior counsel and director of global regulatory matters at consensus, explain that dynamic and why this is the case to have two separate drafts as well as I've heard anyone. Here's Bill. So it has to do with the acid class we're talking about agriculture, committee deals with farming. What's farming about? It's about growing and selling commodities of all sorts. Anything coming off a farm can be a commodity. So everybody in crypto now knows that things like Bitcoin are commodities. They are not financial instruments to like a security is a financial instruments generally markets and commodities are regulated at the state level. If there are markets, however, where you buy and sell futures contracts, which are basically for your average farmer or somebody in the commodity distribution chain. It's a hedging instrument so you can kind of have some predictability as to where prices are going to be those markets because it has to deal with like food and farming that falls under agriculture. So if we're going to call some of these digital assets commodities and we're going to have futures contracts and perps built around these commodities, then those markets would generally fall under the agriculture committee both in the Senate and the House and their jurisdiction. They're the ones that oversee the CFTC who a lot of people are saying should be the ones regulating spot retail secondary trading of these commodities to the extent there's any regulation of it because it's clearly within their drop jar. A lot of these things look more like investments. There argued to be investment contracts and the security is under the how it tests. So we have squarely within the jurisdiction of the Securities Exchange Commission. Securities Exchange Commission is within the jurisdiction of the House Financial Services Committee and the Senate banking housing and everything else committee. So we have basically two different committees who regulate two different aspects of the economy, two different sort of types of marketplaces and the different intermediaries in those marketplaces. It's just the fact that the digital asset ecosystem implicates both of those. Okay, so now that you understand why we have these two sort of separate versions that we now need to combine. Let's jump back into the version that just advanced through the Senate banking committee. Here's Miller White House Levine, the CEO of the Salon of Policy Institute who explained to me what has happened with the Blockchain Regulatory Certainty Act during the market. Going into the morning, we're expecting it to be a partisan market and sitting in the room. There was much commotion among all of these Senator staves as they were going in and out and ended up they were making a deal to try and get Democrats support on the bill overall. What they ended up doing was stripping a reference to the Blockchain Regulatory Certainty Act from the 301 Section 301 decentralized and name only rulemaking. So that is of course, you know, one step back, but then it passed out of committee on a bipartisan basis, which is two step forward. So bittersweet morning for sure. And we'll see where we go from here. Just to quickly give you a bit more detail on what Miller mentions there, the BRCA or the Blockchain Regulatory Certainty Act changed slightly and Queen Center has a good explainer on that. Remember, the BRCA's intention is to just clarify how section 1960, so the unlicensed transmission of money applies to developers of non custodial smart contract software who are themselves not transmitting money. There are still ways for them to go after these developers if they are conspiring to commit money laundering under things like section 1956. So this isn't a free pass for people to commit money laundering not at all. It's just a clarification of law. So we spend less time in courts and the regulators and the business people and developers understand what the rules are and are on the equal plane field. The amendment that Miller references is in section 301 of the bill and Queen Center sort of explains it as this quote 301 still contains robust developer protections. Most notably, the section is premised on a meaningful distinction between decentralized protocols and quote non decentralized protocols, unquote, in which a group of persons under common control have the ability to alter the protocol or restrict access. In other words, if there are actors that do more than simply develop and publish permissionless and neutral software protocols for exchanging assets, then they're going to be captured. So yes, the BRCA remains intact for now and hopefully it stays that way. Unfortunately for consumers and Americans who want to get money on their deposits, you'll took a bit of a bigger hit with the banking lobby pushing back against the payment of rewards to Americans for holding stablecoins. As you've likely heard, the yield debate was a big hold up and the reason why we had a draft of this bill in January of 2026, but it took until May of 2026 for us just to get to this point. And this is the second last point I want to touch on in this podcast. If you recall the genius act allowed for stablecoin issuers to indirectly pay yield. They couldn't directly pay yield, but indirectly and four months of negotiations from January to May led to a compromise on the language around that. Now there are a list of activities that users can do to get stablecoin rewards, but they need to do those activities. The relevant section in clarity section 404, it's titled prohibiting interest and yield on payments stablecoins. So basically if you just hold the asset, you can't receive interest and this prohibition applies to covered parties. So that means exchanges, brokers and platforms not to the stablecoin issuers themselves. That's because their yield prohibition comes directly from the genius act to build does say that the prohibition does not apply to activities that are not economically or functionally equivalent to paying yield on interest bearing bank deposits. So if you're conducting any of these three things, you can get you can be eligible for stablecoin rewards. That is number one payments in connection with transactions payments transfers conversions remittances or settlement activity, including rebates tied to the use of a payment stablecoin. Second is providing liquidity for market making, posting collateral or otherwise putting assets at credit or investment risk. The third is the use of any product or service, including participation in governance, validation, staking or a loyalty, promotional subscription or incentive program. Importantly, the bill also states that permissible rewards may be calculated by reference to a balanced duration tenure or any combination of those. So that basically just means a reward that looks like it's tied to how much you hold for how long which is typical of interest bearing bank deposits is not automatically prohibited, provided it is structured as activity based rather than pure passive yield. That should be settled. I mean, that that was a huge hurdle and I think that's done. Obviously, there's another hurdle. This is like the Olympics where they run the herd like 100 meter hurdles where it's like we've jumped a bunch and we're close. We're close. There's one more hurdle though and the biggest hurdle remaining is the ethics provision. But what are the specifics, right? Like what does the bill actually say? What does it do? Here's Gerald Galger of crypto and America from a podcast we recorded a few months back who explains what he heard about the battle lines around ethics from Patrick Witt. Who's the executive director of the president's council of advisors for digital assets. And remember, this is from a few months ago. So things may have and probably have changed, but I think this point from Gerald's an important one to keep in mind. Patrick Witt said to us when we recorded at the White House a bit earlier this year was that anything that the White House sees on ethics is going to have to be constitutional. One, right, you can't have Congress kind of limiting the president's ability to do business. There's obviously we have like the emoluments clause and there are things that say that the president can't directly benefit from his office. But then also sort of making the point that Congress more broadly has a lot of successful businessmen in it who still potentially retain board seats who have a spouse who's maybe trading who have a son or a daughter who's involved in the industry in some way. And so I think what the White House would just be looking for is you know, laterally applied rules on that issue. And I think I think we can really see the two sides who are negotiating kind of but heads and potentially a stall this out even further. One of Gerald's colleagues at crypto and America Eleanor Tourette who if you're not following on X you should be she's one of the best follows on X just to stay updated on all this. She had a great article on the last minute negotiations that saved clarity. And one of the senators who was a crucial vote from the Democrat side references the ethics provision. And this is Senator Gaiego quote I want to be clear my vote here does not guarantee a vote on the floor. We have many outstanding issues still the resolve toughest and most critical of all is coming to an agreement on ethics guardrails for elected officials. Okay, so what are those ethics provision here's Kyle Blige and from the decentralization research center to explain what those ethics provisions are and the surrounding political situation normally comes down to a couple of things one prohibition on on activities. Can you hold the assets can you allow for a mean coin to be issued in your name you be a direct beneficiary of somebody in your state benefit from that enforcement. If we're talking about covering members of Congress obviously legislative branch or officials in the executive branch who's that watchdog what's going to be the independent agency to make determination of whether somebody violates the statute and how do we actually enforce those rules. And we think members are smart to question whether an office is under the thumb of the executive branch if you are an official that was subject to a Senate confirmation. And the president on the administration endorses that individual whether it's likely for a future president to violate this ethics rule if it's passing to law and their attorney general action you go after that. with who's going to be in charge of enforcement and also who are the cover of officials. Obviously, it's super easy to cover all government civilians and maybe senior staff. Obviously, members of Congress who've been having debates about just banning members from engaging in insider trade and stock trading. So I think you're going to see that same language cover now, members of Congress in this provision and then also which I think is more controversial. And why do you think there's a little bit more friction on whether or not you can cover the office of the president or the vice president? I have to give kudos to Patrick Witt and San Diego and the rest of the bipartisan coalition that's trying to wrestle with these issues because they recognize that this is a serious issue outside of the policy of the rest of the bill. You need to ensure that in comprehensive market structure, consumers are protected, but then in this ethics provision, the public interest is protected. And that's why I think, you know, you see a lot of talking heads of people in the ecosystem, saying, oh, this is the political track. It's like, well, I believe that that talking point has been discredited by Democrats and Republicans recognizing this easy guitar. Question Kyle on this because like I can imagine if I was say I'm in charge and I have companies that are related to the crypto industry, maybe not directly, maybe my kids, my spouse, someone I know has them and the rules like this are being passed like what will happen to those companies, what will happen to me now like the shareholder like, you saw something like maybe the ethics provisions won't take coming to effect until 2028. Like, what's the reality? I don't know like what's the reality there if you can talk on it. I want to be respectful to the negotiating process fair. Yeah. But I will say maybe a way to compromise is you could potentially modify an enforcement date and made me provide for some protection so that there can't be retroactive activities taken to maybe sweeten a deal for this current administration. If this administration or certain politicians believe that this is directly a political attack, it's only because of them. Now just on that political point, Kyle also pointed out the two factors at play in the discussions around any ethics provisions back to him. Yeah. Okay. So just reframing whether you know, if you're congressional staff that are in watch this podcast or people on the ecosystem, this is it's it's two part. There's a political issue. It should be quite frank. And then there's a public interest concern. One is in the political issue. We are obviously working to pass this bill in Congress. These are elected representatives that are politicians. Okay. So they have political interests regardless of whatever side of the aisle you want. You have to wrestle with the politics of an office in order to work and truly understand that office. So under this administration, I do believe that actually it's actually by actually a bipartisan call, Democrats and Republicans have looked at the business dealing of maybe some of the family members of this administration. And they said, Hey, listen, even if people can make the arguments, say this is completely legal, the business operations are without fault. This seems to give the smell of corruption. It seems like people might be leveraging the names or the positions of those in office to benefit financially. And public servants should not be leveraging their office or their position for personal or financial gain. And I think there is a bipartisan coalition on the Senate banking committee and the agricultural committee actually that have actually joined together and said in order for this bill to become a law, there needs to be some provision in place that determines what the rules are for how elected officials, senior federal employees, members of Congress can interact or financially benefit from the issuance of digital assets or related business dealings if it comes from either your spouse or children, etc, etc. Okay, so you know, that's an important hurdle. How close are we to actually getting this bill passed? I'll turn that over to Senator Gallego who told reporters after the Senate banking committee hearing that the ethics deal was at the 99 yard line. And that's per crypto in America. Now I'm a huge football fan myself. Most people don't know this about me, but I actually and don't maybe don't publicize this. I don't know why I don't publicize this, but I write the world's largest NFL newsletter. It's read by over one and a half million people almost daily. I love football. I write it for the athletic. It's free to subscribe. You can just Google NFL newsletter, the athletic, but I love that. I love that we're on the 99 yard line here. This is such an important bill that can lead to so much good in America in the world. It doesn't give the industry a free pass. If anything, the opposite is true at its core, this bill protects the 70 million Americans who hold crypto. It enables the businesses who want to follow the laws to follow the laws to understand what those are. It breaks the chains of regulation by enforcement that held back this technology, this industry and builders. And that's the type of principle that made the United States a special country when we're builders flock to and the rest of the world follows. So we're at the 99 yard line. All we need now is a Derek Henry, a drone bettis, a big burly fullback to get us into the end zone. Let's hand it off to Marshawn Lynch, not try to pass the ball like Russell Wilson did against the Patriots and that super bowl. We got this. Now I know what you're thinking. Dang, Jacob. Is that the end of this podcast? You know, do I really have to stop listening to your soothing voice and your brilliant guests already? You might even be thinking Jacob, you're bald already. Why can't you make it like a Joe Rogan length of a podcast? Make it a three hour one. Don't worry. This is not the end of the podcast. In fact, there's one point that I think is so important. We need to touch on that like if you stop listening before this and miss this point, you're doing yourself. You're doing your clients. You're doing your business. A huge disservice. So give me another five minutes and I promise you won't regret it. And that point is about tax. It's not always a fun topic. It's certainly not a sexy topic, but it's arguably one of the most important parts for builders to understand when considering token sales under clarity. I spoke to the leading US crypto tax lawyer to understand if clarity is viable in its current form. I wanted to make sure we weren't missing any huge thing and honestly, like we're not, but this point is really important. Here is that lawyer. Jason Schwartz of K. Hill, whose answer really encouraged me. I reached out to him after a back and forth he had with Miles Jennings about the viability of token launches in the US under clarity. Obviously, I'm a fan of both of theirs and I admire how Jason and Miles thought through this publicly. Jason had used the term non viable on X when debating with Miles and Miles disagreed with it. And Jason thought about it and said, Hey, you know, maybe non viable isn't the right wording here. I'll let him explain what he meant. Miles called the out on it and look, I think that like his concern was my use of the word like non viable, right? It's certainly viable. It's just that companies that view token sales as a capital raise might be the points it's a learn that they can raise capital for free by issuing data equity in the US, but they're taxed on the sale of tokens in the US, right? So it's just suboptimal relative to issuing data equity. And again, I actually don't think that's inappropriate from a policy perspective. I mean, in the case of a company that issues equity, the buyers now have a claim on the company's assets and the company in the case of a company that issues that same thing, but the company now has has an outstanding obligation. In the case of a token sale, the company is selling something. We can argue about what the tokens are, but whoever buys does not have a claim on anything of the company. The company has this cash basically just free to use in whatever manner it wants. And so under sort of first principles of taxation, that really should be a taxable event. But like companies should be aware that if they do token sales within the US, they're going to have a tax bill as a result. So you think you're raising a hundred bucks, you're actually raising, let's say 80 bucks or whatever, you have to pay that some as well. See, I told you it was important and you'd be glad you stuck around. Now if you're listening this deep in the podcast, you probably maybe even already knew all that. You're probably in the 99th percentile of IQ and looks and taste like you're great. So thank you for listening. But I hadn't seen much discussion about that. So that's why I reached out to Jason and he was kind enough to join me on a Saturday and the middle of his Saturday to talk to me about that. He wasn't the only one Kyle Bligeon did as well. And many of the others you've heard from Lewis Cohen, Miles Jennings, Sarah Brennan, Dougan Bliss, Miller White House Levine, they took time from their busy, and that's busy with a capital B schedules to talk about this, to explain this to you and to me. I can't thank them enough for doing this, but we're not done. We're not done. There's also politicians and staffers who work as hard as anyone to make this happen. And they got a shout outs from everyone who's joined me in this podcast. Obviously, I don't have time to include all those shout outs. But Kyle Bligeon of the decentralization research center, he's in Washington and he's in these conversations. I'll let him say a few well deserved thank you to the politicians and their staff. I mean, I'm going to be sensitive if you don't want to just throw any staff names. A while we're still in the middle of the negotiation. I'll leave it up to their senators to actually get crueos to the staff, but broadly, there's an entire schmortez board of offices that are working together to get this bill to a yes. Obviously, at the top, you've got to give crueos to chair stop and the Senate banking committee staff that have been working around the clock and with industry and their minority counterparts to bring this bill to the state that is in today. Then you got to give a significant amount of respect to the work that alumnus is doing. Per and Senator Jill Brand came out with the first of its kind, comprehensive bill years ago. And they have saved the course this entire time and in charting the path of bipartisan comprehensive compromise. And we are this far and large part because of their efforts. Senator Havney, who I work with his office very closely. I'm a ambassador, it really cares about national security. Was a key negotiated for the Genius Act is also a negotiated for key national security provisions in this bill. And then on the Democratic side, you got Senator Warren, Senator Guy Ega, also Brooks, who reached a massive compromise on yield with Senator Tillis, another senator that's operating in good faith to get this bill to a yes. The broader group of 12 Democrats that are working around the clock, and this bill was brought to them. It was not on their political calendar to get this done, but their staff are demonstrating not only are they willing to dedicate the time, but they're spending the political capital needed to bridge the gap with their Republican counterparts to get this bill over the line, which I think that's demonstrating that these people are operating in good faith and want to get this bill to a yes. And we're fully supportive of that. What Kyle just said, the work that a bipartisan group of senators are doing to make the world safer for the 70 million Americans who hold crypto and to be clear, make the rest of the world safer because other countries will follow clarity, gives me so much faith in the political process and politicians. And I know others feel the same way. Thank you for working your butts off to make this happen. And on the topic of behind, as I said, I'm a football fan, it seems like all we really need is the push push and we're in the end zone. We need to transform into Jalen Hertz behind Jason Kelsey and get this into the end zone. And I'm optimistic we will because the people we've gotten this space are pretty special. Thank you for listening to this podcast. It's part of my mission to help people understand the legal layer of emerging tech so that we can live in a world with transparent and well understood rules that are applied fairly to all. As I mentioned, I think I mentioned at the beginning, if you're a lawyer in Ontario, everything you just heard is eligible for substantive CPD hours. I'm working on getting CLE approval credits for lawyers in the US. Laws can help me afford to make that happen. If you want to stay updated with this podcast, I'm launching the world's shortest legal newsletter at law of code dot FM. So not com, but dot FM. You can subscribe there. It's free to subscribe for now. I'm probably going to charge for it in the future. But law of code dot FM to subscribe and get updated on podcasts. Look, as you can tell, that was a heavy, heavy episode. It took me about 50 non billable hours and I still haven't done the editing yet. So I record this and then obviously I do the editing after I do all the research myself. I coordinate all the guests myself and then I do the editing myself, shout out to my friggin wife for putting up with me working from 7 a.m. on Saturday to 9 30 p.m. And then I'm doing the same thing on Sunday. I'm recording this final piece on Sunday and I'll be working until we leave for a wedding around like three o'clock. But like she knows I love every minute of this and she's so cool in supporting me spending a lot of time doing this. And I'm not saying that to complain or anything. I just want to explain how much time goes into these because I want to do more. I want to spend more time doing this, but I have a mortgage and I can't do it for free. So if you're listening and you're interested in supporting things like this, please reach out to me anywhere on X on LinkedIn. I do only work with world class people and projects I believe in. So I'm hopeful to announce some partner soon. I am talking with people on that. Ilk. Final thank yous obviously to Lewis Cohen of K. Hill next Jason Swartz of K. Hill next to a 16 Z miles Jennings Delphi Sarah Branding and the decentralization research centers Kyle Blygent to finances Dugan Bliss, the slana policy institutes Miller White House Levine, as well as Bill Hughes and Gerald Galger for participating in prior episodes. Also to you for listening and for sharing this, it really means a lot to me, but also to everyone in the political sphere who's putting a ton of work in and every thinker who's made time to talk to me to share things publicly on this. I think that's how we make the world a better place. And I think that's our goal at the end of the day. Now someone find Jason Kelsey and Jalen Hertz and let's get this thing over the line. Thank you.