All About Web3: The Regulatory Outlook for Cryptocurrency

All About Web3: The Regulatory Outlook for Cryptocurrency

Podcast In the Public Interest

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Cryptocurrency continues to dominate the headlines, from starting the year at a high with major TV ads to questions in recent weeks about the stability of the market. In this episode of In the Public Interest, co-host and Partner John Walsh is joined by fellow Partners Tiffany Smith and Zachary Goldman to explore the world of Web3 with Jai Ramaswamy. Ramaswamy is the Chief Legal Officer at Andreessen Horowitz—otherwise known as “A16Z,” an ode to the practice of shortening long words used repeatedly in code by taking the first and last letter of a word and the number of letters in between.

Prior to joining A16Z, Ramaswamy served as the Chief Risk and Compliance Officer at cLabs. He has over a decade of experience at the Justice Department, first serving as a prosecutor focused on white collar crime and cybercrime in the Southern District of New York and later as Chief of the Asset Forfeiture and Money Laundering Section. Ramaswamy also worked in the Computer Crime and Intellectual Property Section at the Justice Department. Smith and Goldman regularly advise clients on regulatory issues related to cryptocurrency and the broader FinTech sector. Both write frequently on regulatory developments affecting the Web3 space, including cryptocurrency and stablecoins.

Smith, Goldman and Ramaswamy probe the many applications of decentralized systems in Web3, from cryptocurrency to NFTs and beyond. Ramaswamy shares why he believes regulatory concerns—not technology issues—will be the principal roadblock in this new decentralized ecosystem. The episode also touches on the delicate balancing act of promoting innovation while mitigating the emerging risks associated with decentralized computing.

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    Speakers: John Walsh, Felicia Ellsworth, Tiffany Smith, Zachary Goldman and Jai Ramaswamy

    Walsh: Welcome to In the Public Interest, a podcast from WilmerHale. I’m your co-host, John Walsh.

    Ellsworth: And I’m your co-host, Felicia Ellsworth. John and I are partners at WilmerHale, an international law firm that works at the intersection of government, technology and business.

    Walsh: In this episode, we’re diving into the world of Web 3. We hear a lot these days about crypto, DeFi and NFTs. We’re going to unpack what those terms actually mean, what benefits these technologies may bring, and also the challenges they face, including from a legal and regulatory perspective. There’s perhaps no one better suited to explore this topic than our guest, Jai Ramaswamy, the Chief Legal Officer at Andreessen Horowitz. Jai brings a wealth of knowledge and experience in both the private and the public sectors. He previously worked at Celabs working on Celo, a mobile-first platform to make crypto payments available through a cell phone. He also spent years working in the financial services industry at Capital One and Bank of America Merrill Lynch. Before that, Jai spent over a decade at the Justice Department as a prosecutor in the Southern District of New York and then at Main Justice, the Washington DC headquarters of the Department of Justice, where he was in the computer crime and intellectual property section, and then served as Chief of the Asset Forfeiture and Money Laundering Section. We’re also joined by two of our partners, Tiffany Smith and Zach Goldman. Tiffany and Zach advise clients in the industry facing novel legal challenges. They’re going to lead the discussion with Jai as we try to unpack this fascinating and frankly complicated topic. Thank you all for being here.

    Smith: Jai, thank you so much for being here today to talk with us about what’s new in cryptocurrency. We are thrilled to have you for what promises to be a fascinating discussion, and I’m joined here with my colleague, Zach Goldman, who, as you know, I work very closely with on these issues.

    Ramaswamy: Well, it’s a pleasure to be here and thank you for inviting me. I just want to make very clear that anything I say today should not be taken as investment advice. We’re just having a general discussion on digital assets and the Web3 space, but want to make it clear that nothing that I say should be taken as investment advice going forward.

    Smith: Excellent.

    Goldman: Jay, thanks so much, again, for joining. Before we dive into that discussion about Web3 and crypto and the future of the internet and financial system, we’d love to hear a little bit about your own background. You spent a decade as a prosecutor focused on cybercrime and money laundering, perhaps not the traditional path to becoming the Chief Legal Officer of a venture fund, and we’d be really interested to understand how those experiences shaped what you are doing today at Andreessen Horowitz.

    Ramaswamy: Sure, I think my career, like all careers, make a ton of sense in retrospect. While you are going through them, they tend to be a lot of really interesting opportunities and avenues that just seem great at the time. And, I think, that the two things that I’ve tried to pursue in my career is (1) be around smart people. You tend to learn more if you’re surrounded by people that are, in fact, smarter then yourself, and I’ve always found those kinds of environments to be more engaging for me, personally, and professionally. And the second thing is to be around people that you respect and in institutions that have a mission. And that’s always driven me is to be around institutions that kind of serve a greater purpose and that’s what drew me to the government. As you point out, my career in the government was focused on white collar crime, cybercrime, money laundering issues. And, I think that throughout my DOJ career, I was interested in the intersection of technology and kind of white collar crime. It was just an area that drew my interest. And that’s what drew me to cybercrime and some of the earlier cases I had in cybercrime, in fact, involved early versions of virtual currencies, like E-gold, Liberty Reserve, which were not distributed ledger technologies, but they were attempts to kind of bring a payments framework onto the internet, which is one of the initial failings, if you will, of the technology inherent in the original internet. But they also brought bad actors, I think, into the ecosystem. My own view was that you shouldn’t judge technology by whether bad actors use it or not. Bad actors are just like any other human being, everyone is going to use technology and there are bad actors that are going to use it. To me, it has always been much more of a risk management question, which is what do you do with newer technologies, and what kind of frameworks do you have in place to make sure that you minimize the risks. Understanding that, I’ve made this comment sometimes it may be an overstatement, but bad guys have used technology since the earliest days. I imagine the first use of fire was to cook food, and the second use was probably to commit arson. It’s just kind of inherent in who we are as human beings. And, I think, we have to recognize that. But later on in my career at DOJ, I focused kind of heavily on money laundering issues, sanctions of agents’ issues, Patriot Act issues which, you know, in the early part of the 21st century, were kind of where the action was and where a lot of interest and focus of the government was following 911. And, in that context, we started to see the rise of cryptocurrencies, bitcoin in 2009, but also other kind of virtual payment systems and I became interested in it, but within a larger context, which is that we were also pursuing some fairly large-scale prosecutions of financial institutions for various AML and sanctions violations. There’s a fundamental technological shift that really fascinated me, that I wanted to be a part of. And that’s kind of what drew me to this space and then sometime into my role as the Chief Risk and Compliance Officer, an opportunity came up to work with Andreessen Horowitz on their regulatory policy with respect to crypto. And that was fascinating to me, to really be able to focus on specific regulatory issues that were facing this space to be at the ground floor of that conversation and to really help shape this space because my feeling was that, hopefully not underestimating the difficulty of technical challenges. But I guess I came to the conclusion that the technical challenges were going to be solved. We have a lot of really smart computer scientists, cryptographers, mathematicians working on this stuff, but that one of the long poles in the tent were really the regulatory issues. And to be involved in a place where regulatories were at the forefront of the conversation, seemed fascinating to me. And so, I made the move, and then shortly after joining internally as we were considering within Andreessen Horowitz what the future looked like, an opportunity arose to be the Chief Legal Officer and to help fashion an approach to venture capital that could incorporate some of the insights we were seeing from both Web3 as well as traditional venture capital and come up with legal strategies that could treat them the same, and so, I’ve had great opportunities that have come along, people who are, in many ways, smarter than me have entrusted me with the ability to deal with some of these problems, and I’ve been fortunate is all I can say.

    Goldman: That’s fascinating and there’s so much that was rich in what you just said that we would love to unpack and, I know, Tiffany is going to dive in in a second to, some of the issues you touched on about how cryptocurrency and Web3 technology is not just about financial applications. It’s much more foundational than that, and I think, obviously, we’d love to hear your views on that. Before we go there, I wanted to just pause on one of the things you mentioned about the way you’re looking at the regulatory issues in the cryptocurrency ecosystem. And, I think Andreessen seems, as it sort of announced to be, somewhat unique in that it has built out a large in-house sort of public policy and regulatory team, and I would love for you to just reflect for a moment on how and why you see the regulatory issues as being so central to the cryptocurrency landscape, the Web3 landscape. People, I think, would instinctively think about the technology issues as the sort of principal obstacles to further development of the ecosystem, and you seem to be suggesting a slightly different approach where regulatory variations are front and center, so if you wouldn’t mind, just saying a few words about that that would be great.

    Ramaswamy: Sure. I think it’s consistent with A16Z’s philosophy and how it enters this space, which is to be the greatest partner that we can be to entrepreneurs, and one of the hallmarks of our model is that we invest in companies that we have a belief in, but we also try to provide support for the entrepreneurs in different ways in different shapes on operational issues. And many of our early investors were, in fact, from the operating side from operating companies. And, I think, when you translate that to Web3, there are a whole host of issues that aren’t necessarily faced in a traditional startup company environment, and one of them, as I mentioned, are the regulatory issues. The regulatory issues tend to be more important in the Web3 space than elsewhere, only because of the uncertainty in this space. You know, entrepreneurs, in my experience, both in my previous project as well as here, really do want to get this right, but it takes quite a bit of esoteric knowledge, candidly, to navigate through this space. And, I think, that they look for guidance and we want to be a resource, where appropriate. We’re not going to be their lawyers; we’re not going to perform services that can only be performed by their in-house folks. But we want to provide guidance where appropriate and possible, and we also want to be part of the conversation, part of the public conversation that’s happening in Washington and other capitals around the world within the tech community to translate what this technological revolution means for public policy, and how the public policy environment should respond in a way that doesn’t crush the innovation, but does mitigate the risks that are going to emerge as with any new technology. And we want to be part of that conversation because it surely helps our ecosystem partners and the startups that we assist, but we also see it as a broader issue which is this really is a revolution that’s going to be as important to computing and to society as the internet was. And you want to be part of that, especially when you have a kind of breadth of knowledge, as we do, of this space, seeing the full industry as it’s developing, the full gamut of companies that are out there. We have a unique perspective that we want to bring to bear, and so I think it’s that dual-facing role both internally for our portfolio companies, but also externally to help inform policymakers, the public, about what we’re seeing changing under our feet, which may not be perceptible to most people because they’re not in this day-to-day.

    Smith: Yeah, it’s worth noting that certain of the points you made about both understanding the potential for the innovation, and fostering that, but also having regulation that addresses those risks is very reflective of what President Biden said in his executive order about crypto, which, as you know, everybody in the industry viewed as positive because it both recognizes the United States’ interest in being a leader in this space, but also it talked about the potential for financial inclusion and other benefits, but also discussed the risks. So, it’s very balanced. So, I think, that the work that you all have done is going to be a very important foundation, as we see the studies that come out from that report, and we move to the next generation of the internet in Web3 and cryptocurrency, which is a perfect segue to what I want to talk about next, right. So, we’ve mentioned Web3 a number of times, so can you just kind of back up for a minute and help us understand what Web3 is.

    Ramaswamy: Absolutely. And to understand this, I think, you’ve kind of got to open the aperture a little bit. I’m going to give a plug to A16Z State of Crypto Report which our crypto team, Chris Dixon and others, have really provided a view of what’s happening in the industry from a broad lens. And, if you read that, the things that you’ll recognize is that what we’re talking about is a paradigm shift in computing platforms. And, I think, that’s oftentimes missed in the broader debate or perhaps not fully appreciated. I think that’s the best way to think about this is something that, again, is in our State of Crypto Report and that Chris Dixon explained well. Web1, if you think about it, was read only. Think of Google, you could access information anywhere and you can consume it, you can read it. Web2 was read, write. You consume information, but you can also publish it. But the rise of that, Web2, also created platforms that exert, in a sense, influence on the shape of the internet. Web3 is read, write and own, where you can actually own a little part of the internet. It’s actually native property rights on the internet that allow you to own content, to own information on the internet. And it makes it kind of read, write, own. And that’s the paradigm we’re talking about, where new business models are now possible because there’s new forms of ownership. We don’t have to rely solely on data exploitation and advertising models that are inherent in Web2, and the economies of scale and potentially monopolization that that allows, but we can move to new distributed forms that generate far more revenue for content creators, for example, rather than having the take rates of the platforms be the major component of the economics there. And, that is a profound shift both from a technological point of view, but also from a business point of view, that is going to shape the way we think about a whole host of industries in the future. It’s not going to be cabin to one or the other. We’re going to see this and we are seeing it kind of wash across the technological landscape more broadly. That’s, I think, the importance and the impact that Web3 is having, and will continue to have in the future and that’s what makes certainly me excited and I think us, as a firm, excited about this technology.

    Smith: I must say that is the best description of Web3 that I’ve ever heard. I’m definitely going to borrow that so, if you hear it again, it was definitely me borrowing Jai’s words that he borrowed from someone else, so.

    Ramaswamy: Yes, to be clear that is a borrowing from people at our firm who are far smarter than I am. If you think about what you actually own today on the internet, you actually don’t own things. You have extensive licensing rights with platforms that own things, and it tends to come up when Amazon decides that a movie you’ve purchased is going to be taken away from you, or when you realize that the e-book that you purchased on a specific platform can be taken away because there’s a dispute in the background. You watch Cable TV and the channel is taken away from you, so we intermediate our experiences with the internet through platforms and we have licensing rights with those platforms. But we don’t have property ownership in the same way that we do when you own an actual book. When you go to the store and you buy a book, you can lend it to your brother, your sister, you can sell it back to somebody, you can do a whole host of things with it, and then broadly more when you think about property rights. You own it, and you can do things with it. You can hypothecate interest, you can leverage it, and that doesn’t work in the same way with things that are essentially licensed to you. What Web3 allows is ownership of, whether it’s an NFT or whether it’s a token, it’s ownership of that thing natively on the internet. Now, the law still has to catch up, in certain instances, with the framework around how we treat these things, but nonetheless, that’s the core thing is that you actually own it, you digitally own something in an analogous way that you physically own it. And that’s what I mean by owning a part of the internet is when you have a token and you’re participating in governance decisions, you are part of that community and you have a stake in that community, and you’re owning a piece of that technology directly, not through a third party. You can’t own Microsoft Excel. Microsoft owns Microsoft Excel, and you own a share in that company. When you’re talking about tokens, you have a direct interest in the governance and in the participation in that community directly. There isn’t an institution that’s mediating between you and that, that actually owns the software. It’s all open source and you participate in it. When you own an NFT, and there’s lots of legal issues around copyright other things, so I don’t want to simplify this, but, in its purest essence, you own it, digitally, and there’s still some catchup that has to be done in terms of the framework of how we think about that. But conceptually that’s what’s going on here. That hasn’t been possible before, as I said, in these other paradigms of the internet that has existed, and that’s the game changer, if that makes sense.

    Smith: Can you dig in a little bit about who stands to benefit most from the decentralization that Web3 provides.

    Ramaswamy: I think it’s hard to say. It’s as hard to say as it was in 2001 or 1997 who was going to benefit from the internet. To a certain extent, we’re speculating. I think that some of the initial beneficiaries that we certainly see here are content creators. I think platforms and other intermediaries will figure out ways to monetize Web3 as well. But, to me, the biggest potential gamechanger is the distributed economic benefits that are possible here. I think we have to take care, and, I think, this is why the regulatory conversation is important to make sure that we’re viewing things in as broad a light as possible to make sure those benefits actually accrue because one of the things that I worry about is that some of the impetus within the regulatory environment is to force decentralized models into centralized paradigms, which actually reinforce our economic power structures as opposed to allowing this technology to disintermediate power and influence. And so, there’s actually a, believe it or not, a bit of a push and pull here between the technology itself, which is decentralizing and policy which is forcing centralization. And look, I think that there are valid criticisms of the environment that say, hey, maybe it’s not as decentralized as it should be. It could do better. That’s true in any industry, right? But, to me, it’s leveraging the uniqueness of this paradigm and making sure that it can live up to its potential. That’s what we should all be working for, is the upside potential here to really distribute gains of this new ecosystem in a way that seems to be fairer than what we have today.

    Smith: Excellent. At a high level, could you just give us a sense for how Andreessen thinks about identifying promising companies in this space.

    Ramaswamy: That’s probably something I’ll stay away from. What I will tell you is that the way we think about this is as a broad technological shift and the kinds of areas that, in general, broad technological shifts tend to influence those kinds of industries that we’re all familiar with. We’re going to see impacts in finance, but we’re also going to see impacts in entertainment, in content sharing, in publishing. I would almost turn that question around and say I can’t think of a part of the economy that it’s not going to influence, candidly. There are obviously going to be some parts where it’s too remote, for example, is biotech necessarily going to be implicated by this, but, to the extent that it changes an information paradigm, you’re seeing companies interested in healthcare records, you’re seeing companies interested in decentralized identity, you’re seeing companies interested in property rights. All of those things are being influenced by this technology. We’re in very, very early days. But that’s the way I certainly view it, is that this is something that has the potential to impact the economy, as a whole, which is why I think it’s a little bit misleading to think of it as a sector. When we think of Web3, it’s not a sector of the economy so much as it is a foundational technology or a kind of additional computational error on the internet that will have broad impacts across the economy, and across society because I think there’s social implications of this as well.

    Smith: Excellent. You touched on this a bit earlier, but can you help us understand how you think about Web3 and cryptocurrency. Are they similar or what’s the relationship between these two different concepts.

    Ramaswamy: The important thing to realize is that some people oftentimes say I’m for block chain, but not for cryptocurrency. And I think that’s a bit of a misunderstanding of the technology. A block chain without an incentivized layer, which is what cryptocurrencies provide, is really just a database. The new thing about Web3 is that you create incentive structures to bring people into the ecosystem, to provide resources to a distributed network, and they get compensated in these digital assets. And also allow users to pay into the system using these digital assets, and so, you have a sort of merging of users’ infrastructure providers as well as content creators on these systems and they become community-owned systems, and at the heart of it, is the incentivization that cryptocurrencies or digital assets allow, and so, I think it’s important to realize that Web3 is inherently integrated with digital assets. They’re not really separable in a real way, and you see this in kind of the development cycle of how interest kind of accrues on these systems. There’s no doubt that we see and we have seen price movements of digital assets, and because we’re talking about an incentivized internet, we’re bringing economics into the internet itself. It’s no longer separate from the internet, but it’s inherent on the internet now that there are going to be kind of price movements that happen with these digital assets. But what’s important about these price movements is and, I think, this is also in our State of Cryptocurrency Report, it drives innovation. It drives the developers who are developing on these platforms, and it’s ultimately the interest of developers and people building on these platforms that it’s going to drive that innovation, that’s going to drive adoption, and the incentive structures, created by cryptocurrencies, are what drive that development interest, in the same way that what drives the interest in a company is incentivized. But we’re talking about now a distributed system that’s incentivized. So, I don’t think that they’re as distinguishable as some people seem to suggest. When you delve deeper, you realize that it is, in fact, the incentivization that’s unique and that’s new about this system. And, as I said, we’re still kind of in early days of what all this means.

    Smith: That’s fascinating and a very interesting perspective because, you’re right, there’s a lot of folks who separate the two concepts, but I think, thinking about that together and the incentivization is critically important.

    Goldman: Jai, by way of wrapping up this part of our conversation, I wanted to ask you about stablecoins. These are crypto tokens, generally speaking, that are pegged to an underlying asset, usually the U.S. dollar, and starting with the President’s Working Group Report in November of 2021, there’s been increased discussion about a potential regulatory framework surrounding stablecoins. So, we’d love your views on that and would appreciate your perspective on what that framework should look like or what, at a minimum, it should focus on.

    Ramaswamy: Look, I think that at the heart of a lot of concerns around stablecoins is what are backing these assets. And, to me, the heart of any regulation that’s going to emerge is around transparency. It’s about knowing what is backing these things. And, if you think about it, that’s kind of at the heart of most of the regulations, whether it’s banking regulations, securities regulations, etc. that govern this space. So, I don’t think that there’s anything particularly ground-breaking that I can share in terms of a vision. I think there’s a lively conversation going on, and I think people recognize that. The one caveat I would kind of make around stablecoin regulation is that, as with all things in the crypto space, because we’re talking about a programmable value layer, some people call it programmable money, but it’s really a programmable value layer on the internet. The use cases are going to be broad and wide and probably things that we can’t even think about today. And so, I think, it’s going to be very important for regulators to take a really nuanced approach to understand what are the types of “stablecoins” whatever we call them that have sort of direct financial impact that could have potential ramifications for the financial system as a whole. I think we’re still in embryonic days, and I think that even Treasury has admitted that they’re not seeing systemic impacts here yet. It’s more an emerging risk than an existing risk in terms of systemic impacts, but we could see it in the future, and figuring out what those are. And so, I would just caution regulators to understand that, yes, of course, things that are clearly financial and that have clear financial impact, we absolutely need a framework, but also understand that there are some very interesting things going on here that are tangential to what’s happening in kind of financial markets. Sure, they’re adjacent because we’re talking about an incentivized internet and to tread carefully so that we don’t crush some pretty interesting things that are happening in that space. And that would be my caution. I’m not so much in the prognosis business. I was in the government. I know how difficult it is to come up with regulations in this area, and to get consensus and drive consensus so I probably wouldn’t be a good prognosticator. They’ve got a hard job ahead of them. It’s more power to provide guidelines; it would be to make sure that we’re addressing existing risks, we’re monitoring emerging risks and dealing with things in a nuanced way so that we’re not crushing some really interesting and innovative things that could change society for the better, but we missed that opportunity because we’re trying to shoehorn things into a single given model. I think that would be my pitch, if you will, to regulators. Take things in a nuanced way. And it’s also consistent with the way we think about risk management. I have been in risk management for a long time in my post DOJ career, and that’s typically what you do, you address existing risk, you monitor emerging risks, and you look for opportunities and make sure that innovation allows those opportunities to flourish and, I think, that’s what the government is calling responsible innovation. I think we certainly agree with that, but it requires a nuanced and careful approach, rather than treating everything with a broad brush, which is what you tend to do when there’s massive change, right. I think there’s a benefit to taking a more nuanced approach here.

    Goldman: That makes a ton of sense to me, of course.

    Smith: So, that brings us to the conclusion of today’s episode. Jai, thank you so much for joining us and talking about this very fascinating topic. And thanks so much for a description of Web3 that now Zach and I are going to use everywhere we go and to attribute to you and others until we start getting charged for it via the new Web3.

    Ramaswamy: I am definitely stealing this from others so I want to make sure they get the credit for actually coming up with this.

    Goldman: Thanks so much, Jai.

    Smith: We appreciate your being here with us.

    Walsh: Thank you, Jai, Tiffany and Zach for joining us to talk about this fascinating and fast-moving topic and for helping to demystify, a little bit, this idea of Web3. It sounds like there’s much more to come in this space and we’re now better equipped to understand it.

    Ellsworth: And thank you, everyone listening in, for joining us on this episode of In the Public Interest. We hope you’ll join us for our next episode. If you enjoyed this podcast, please take a minute to share it with a friend and subscribe, rate and review us wherever you get your podcasts. See you next time on In the Public Interest.

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