All About Web3: The Regulatory Outlook For Cryptocurrency (Podcast) – Fin Tech

In This Podcast Episode

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

Related Resources:

Episode Transcript


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

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

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,

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

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

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

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

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

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
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