Kyle Lawrence [00:00:00]:
CyberKongz goes Knives out. Coinbase gets W & AI agents know what you're having for breakfast tomorrow. All that and more coming up on Block and Order. Welcome to Block and Order, the show that explores the legal issues facing the world of Web3 and beyond. I'm Kyle Lawrence, and with me, as always, a man so smart he can solve a Rubik's Cube while juggling chainsaws. Moish Peltz.

Moish Peltz [00:00:33]:
If I could do either one of those, Kyle, I'd be really impressed, but I don't think I can.

Kyle Lawrence [00:00:38]:
I had assumed that you would be able to do one of those. You probably can juggle chainsaws. It's not the problem.

Moish Peltz [00:00:45]:
I would just need to practice.

Kyle Lawrence [00:00:48]:
Just go to Home Depot and practice. I'm pretty sure that nobody would arrest you or kick you out of the store. I cannot juggle at all, nor can I solve a Rubik's Cube. Although I guess I've never tried. I don't know.

Moish Peltz [00:01:01]:
You've never tried to. Solid. I don't think I have one at some point.

Kyle Lawrence [00:01:07]:
It's like a parlor trick at a party or something, but not. I can clap with one hand in a weird way.

Moish Peltz [00:01:13]:
Yeah, okay.

Kyle Lawrence [00:01:15]:
No, I never have. So maybe next episode that'll be. We'll just sit here and watch me do it either for 30 seconds or for three days, depending on how slow.

Moish Peltz [00:01:23]:
Meditative state of dissolving Rubik's Cube over the course of dozens of hours.

Kyle Lawrence [00:01:28]:
Exactly. Well, Moish, I think we're going to try something a little different on today's episode. Normally we do our typical point counterpoint with the topics du jour, but I think we're going to start with the CyberKongz Wells response, if I'm not mistaken.

Moish Peltz [00:01:43]:
That's right, Kyle. We're going to try something a little bit different today, and that is we are going to take a look at a Wells response submission from Council for CyberKongz in response to a Wells notice received by the sec. So if it's okay with you, I think we're going to take some time. We're going to run through this document. We're going to basically read it for our audience and give some thoughts as to what we think, because I think this is a pretty interesting document. What do you think, Kyle?

Kyle Lawrence [00:02:15]:
To be honest, I've. I knew they responded, but I have not dived deep into what their response was. So this will be kind of a learning on the fly moment for me, and I'm here for it. I'm ready.

Moish Peltz [00:02:26]:
All right. Well, this is exciting. So, you know, first of all, this is from January 7, 2025. We're recording today, about a week later, January 14, 2025. It's from from council and as you can see, it's saying to the enforcement staff of the SEC who issued a Wells notice to Cyberkongz LLC and that Wells notice alleged violations of Section 5 of the securities act against CyberKongz relating to the Genesis NFTs and bananas which the staff uses investment contracts under Howey and under Section 15 of the securities act and against know there's redacted is the original founder, it appears of CyberKongz arising from his receipt of Web3 creator fees. So Kyle, you see in this section here, the proposed action would allege Violations of Section 5 of the securities act of 1933 relating to the Genesis NFTs and banana tokens which the staff views as investment contracts under Howey and Section 15A of the securities Exchange act of 1934 against the redacted artist arising from his receipt of Web3 creator fees. So what's the distinguishment between here Section 5 of the 33 act and Section 15A of the 34 Act?

Kyle Lawrence [00:03:49]:
It's interesting. I'd be curious again to see what the actual Wells notice is or to see what information the SEC has in sending out this Wells Notice. Section 5 of the securities act of 1933 is basically the requirement that anybody who sells a security register it with the sec. Security being an investment contract. We we've talked about Howey, on the past on the show, and I'm assuming we're going to get into it a little bit more as we scroll down. But essentially if you sell something to an investor, it either has to be registered with the SEC or it has to be filed pursuant to one of the exemptions from registration with this, which is a lot of the work that I do. So you sell something has to be registered or has to be exempt. Section 15 of the Exchange act relates to broker dealer rules.

Kyle Lawrence [00:04:36]:
So so basically, if you're somebody who trades securities for somebody else or takes in money and raises capital for somebody else and you get paid as compensation for rendering that service, you need to be a registered broker dealer, you need to be registered with finra, you need to be registered with the sec. There's a lot of different and very complicated rules depending on what you are, what you're doing, what state you're in, you know, how much money it is, et cetera, et cetera. I'd be curious to see how that even comes into play here because that would mean that one, there is a securities offering and two, somebody profited or received compensation on the basis of like raising capital in connection with it. That, that seems awfully tenuous. We'll scroll down and see what, what it gets into here. But that seems kind of strange.

Moish Peltz [00:05:20]:
Yeah, I mean, I think, I think that has to relate to CyberKongz and the artist, you know, failing to Register under section 5 for the issuance of the NFTs and the banana tokens and then as against the artist, you know, for his receipt of Web3 creator fees, like I guess saying he's a broker for receiving like NFT creator fees. So, you know, I guess, I guess we'll see how that works out for you. Sec. Yeah. And so we don't have the benefit of the actual welts. Notice, as far as I know, that's not a public document.

Kyle Lawrence [00:05:55]:
That's correct.

Moish Peltz [00:05:56]:
So we are, to be, to be fair to the sec, we're relying now on, you know, one side of the story. So we'll see what they end up if anything comes from this and they end up bringing anything. So the other note, you know, just as part of the introduction here, the. It seems clear that the SEC staff use the offer and sale of securities. Both the Genesis NFTs and the banana token to have occurred on October 17, 2021, which is the date that the Genesis NFT smart contract was upgraded. So it was from an initial OpenSea smart contract where the creator had basically put up the NFTs, the thousand original Genesis NFTs, to a new smart contract that included the banana token as a future. And so even though we don't have the SEC's original Wells notice, we do know from the summary, the summary treats it as the SEC is mad about the upgrade and deployment of the new Genesis NFT smart contract, which included the banana token. And you can't get around it.

Moish Peltz [00:07:04]:
We're talking about banana token. It's kind of funny, but this is crypto.

Kyle Lawrence [00:07:08]:
It is pretty funny.

Moish Peltz [00:07:10]:
So in here's the kind of overview of Cyberkongz is a 1000 collection. NFT 34 by 34 pixel gorillas were among the first to popularize NFT mechanics such as tokenomics utility, token, banana breeding of Baby Gorilla NFTs, of the exclusion of 3D avatars designed for Metaverse and gaming and community utility, et cetera.

Kyle Lawrence [00:07:38]:
Interesting to note that CyberKongz, I didn't know this. They're registered in St. Kitts and Nevis, a small country down in the Caribbean, which honestly makes Sense. We've seen all of these companies register in the Cayman Islands or Marshall Islands or wherever it may just outside of the United States jurisdiction. So no shocker there. And they still got dings. So just word to the wise out there, just because you set your company up outside the United States does not absolve you of liability if the SEC comes after you.

Moish Peltz [00:08:06]:
Well, so that, I mean, that's exactly it, right? Everyone's like, oh, we're going to set up this company offshore and spend all this money because then the SEC can't come get us. Right.

Kyle Lawrence [00:08:16]:
But sorry, doesn't work that way. And. And when I. And I would tell that to clients or prospective cl. And they would look at me like I'm crazy. So, no, I'm not. Thank you.

Moish Peltz [00:08:28]:
And even here, look, right, the artist, even though we don't know his name, he's from Europe. Europe. So European artist, St. Kitts and Nevis LLC. Wells notice here. Here we are. Now, obviously the SEC would still have to establish jurisdiction and so forth in the context of litigation. So they'd still need to like, find a way to haul them into court.

Moish Peltz [00:08:52]:
That's the, the sum and substance of this. Wells response is not there's no jurisdiction over us, but. But who knows, Maybe there's other discussion. So I'm not sure. You know, this is interesting too, right? The initial sale back in March 2021, the guy fell asleep, woke up to learn that all 989 or so on sale had sold, earning about $15,000 of which he donated the bulk of the proceeds to two charities. So the guy. The guy made $15,000.

Kyle Lawrence [00:09:27]:
Yeah. It's so quaint.

Moish Peltz [00:09:28]:
He's right. Donating most of it to charity. Okay. And at the time did not exist as a project. Had no website, no community, no employees. Twitter account was open just a day or two before the art would happen oversea.

Kyle Lawrence [00:09:44]:
This is incredible.

Moish Peltz [00:09:45]:
And Discord Channel was open the last day of the sale. So there's no marketing for the sale. Man, 2021 NFT vibes like. I love it.

Kyle Lawrence [00:09:53]:
I know, it's incredible. Hard to believe that they launched at that point. For some reason I thought they existed earlier than that. But I guess that's when the real NFT bull run was.

Moish Peltz [00:10:04]:
Well, so what Board Apes was. Was like a month later, I think early April.

Kyle Lawrence [00:10:08]:
Oh, really? I don't think I realized that. Yeah, I thought it was okay.

Moish Peltz [00:10:12]:
This is right in the Bayday because. Because I think the. The one big thing that had happened before that was. Was the NBA top Shot launch, which I think was back fall of 2020 was when it became popularized. And so then it was like early 2021 when people started realizing, oh, you can make lots of money flipping NFTs. And that kind of led this like cascade of new.

Kyle Lawrence [00:10:39]:
Yeah.

Moish Peltz [00:10:39]:
NFT sales.

Kyle Lawrence [00:10:41]:
Interesting. Wow, a real history lesson here today.

Moish Peltz [00:10:43]:
Yeah, we need a time. I have a timeline somewhere. We could pull it up. We should start Charlie Day with the map of different.

Kyle Lawrence [00:10:52]:
The bird law.

Moish Peltz [00:10:53]:
Yeah, well, bird law is a different.

Kyle Lawrence [00:10:55]:
Thing, but I know.

Moish Peltz [00:10:57]:
All right, so then we're getting into interest arising for CyberKongz after the NFT sale and the idea of the banana token coming from the community itself. So of course it went viral. Community participants began advocating for the building of a larger ecosystem. Banana, which is a concept, did not exist until after the March 21 sales were completed, began circulating as an idea for the ecosystem.

Kyle Lawrence [00:11:25]:
Yeah, sorry.

Moish Peltz [00:11:28]:
No, I mean, feel free. I'm not trying to monopolize the screen here.

Kyle Lawrence [00:11:32]:
It's just, it's interesting that it's user generated and a user based idea which to me if we're looking at it from a pure investment contract standpoint, I just don't understand how the SEC or any agency can, can claim that it's an investment contract when it came from the users themselves. That just seems to fly in the face of what these protections are meant to cover. I don't know, that just seems so counterintuitive to me.

Moish Peltz [00:12:01]:
Well, that's, I mean that's the whole thing of if you look at the Dow report, which is the 2017 guidance from the SEC, some of the only guidance we actually have, the original DAO was very much like an ICO of we're going to sell this and then things might happen, we might make money and everyone's going to share in that. Which was very much, I think a top down securities law analysis. But I think this community, when I think DAO now, I think very much of this community of there's this thing that we all center around, but it's very much community driven. And yeah, there might be people that are more or less spearheading the community, but essentially the community make suggestions, they're going to take a temperature check and then whatever the community consensus is is what's going to kind of rise out of that. So and that's what you're seeing here is community idea of gorillas, bananas breeding, eating bananas to get baby NFTs, using the banana to customize your NFTs, writing a customized biography for it based on the banana token. Community gaming, providing banana all at once for breeding. So otherwise you can breed all 4,000 baby NFTs in a single day. So there's daily yield.

Moish Peltz [00:13:18]:
So 10 bananas per day for 10 years. For Genesis NFTs arose from this idea. And then the BabyKongz. NFTs could be collectibles that could be traded, have different attributes. People claim all the banana in one day because.

Kyle Lawrence [00:13:34]:
And just to reiterate, the SEC has held collectibles are not securities. Sorry, I had to get that in there.

Moish Peltz [00:13:43]:
Well, so that's, that's why they're emphasizing in this Wells response these concepts. Right. Community driven. The collectible nature of the activity, gamified ecosystem. Slow drip of collectible NFTs for free that keeps the community enthusiastic and engaged. This all sounds like trying to frame this as not a securities transaction, but as a communal art thing.

Kyle Lawrence [00:14:13]:
It's the Aaron Sorkin defense. You remember that show Newsroom, which, Forget about politics. The reason I didn't like that show is because that entire show was Aaron Sorkin framing a specific argument in a way that only he could win. And then he proceeded to win the argument. And that's, that's kind of what they're doing here. I'm happy to agree with them. But. But that's what they're doing.

Moish Peltz [00:14:31]:
Yeah, I mean, well, that's any, any legal brief, you know, you're, you're advocating for your position.

Kyle Lawrence [00:14:36]:
Right?

Moish Peltz [00:14:36]:
So that's, that's the idea here. So. So again, if we had the SEC side of it, we can compare them side by side. Right, but we don't have that.

Kyle Lawrence [00:14:44]:
We don't.

Moish Peltz [00:14:45]:
I wish we did. I wish, I wish we did have kind of a fully fleshed out record that we could do that. Right. But that's not.

Kyle Lawrence [00:14:51]:
We, we invited Gary Gensler to appear on our show. He has an open forum to discuss this and any other matters he would like. Commissioner Gensler, the, The mic is yours, sir.

Moish Peltz [00:15:02]:
Five more days.

Kyle Lawrence [00:15:03]:
Got a couple more days.

Moish Peltz [00:15:06]:
So, you know, here's, here's some more detail on the evolution of the banana token published on a medium article having immediate utility because owners of two Genesis NFTs could use banana to breed a baby gorilla. NFT using the banana as an input. And you did not have to update your smart contract, you know, your NFT onto the new contract if you didn't want to, but you could. So April 17, this is what, about a month after the NFT sale. Man, things used to move so quick. Now it takes years for anything cool to happen.

Kyle Lawrence [00:15:46]:
Exactly.

Moish Peltz [00:15:48]:
The genesis NFT was upgraded, introducing new futures. Okay, so here we go. And it's including, right, this gaming NFT ecosystem and a play and collect adventure run game for cyber Kong. NFTs and minting experience. So like, you know, all this things happening again. No one paid to receive banana.

Kyle Lawrence [00:16:13]:
Yeah. There's no infusion of capital. There is no investment of money. There is no investment contract.

Moish Peltz [00:16:21]:
So here's what they say, Kyle, as there was no investment money.

Kyle Lawrence [00:16:25]:
Hey, look at that.

Moish Peltz [00:16:25]:
There was no pooling of funds, no horizontal commonality. And because no money money was invested, there could be no expectation of profit derived from an investment. So Kyle, what does no horizontal commonality mean?

Kyle Lawrence [00:16:40]:
To be honest, I'm not sure how they mean it in this particular context, but the concept that they're getting at is we all know what a Howey Test is. For better or for worse, it's an investment of money in a common enterprise with an expectation of profit. Profit derived from others. If I had to guess, they're talking about the second prong, the common enterprise. In terms of horizontal commonality. There is no common enterprise here. It's each person can basically play the hand they were dealt. They can do what they want with their NFTs, they can do what they want with their banana token.

Kyle Lawrence [00:17:14]:
It's not, I'm putting in money and I'm going to sit back and the makers of this game are going to make some money and then share it with all of us. That's not what's happening here. There is no investment of money. There is clearly no common enterprise. And any profits that are going to be derived are really derived ostensibly from your efforts, not the efforts of the founders. I just, again, I agree with you in that we have to take this somewhat with a grain of salt because we're only hearing CyberKongz's position on this. But assuming that these facts are true and we have nothing else to gauge it against, I just don't understand the SEC's position here other than it's just their last salvo before they all leave. It doesn't make sense.

Moish Peltz [00:17:55]:
Well, to play devil's advocate, I mean there is an LLC here. I mean they didn't mention. Right. By the way, like when the LLC was formed and kind of the efforts that went into the centralized vehicle behind this whole enterprise. But presumably there was some at least minimal activity to do that and there was some development of the smart contract which was deployed, which then launched a token. Right? So Kyle, what about that? Isn't that kind of a common enterprise?

Kyle Lawrence [00:18:34]:
Arguably it could be, yes. But I would think in order for there to be a common enterprise, it's kind of, we're all in this kind of together and we all, we're all playing by the same rules in terms of profitability. A simpler example is your typical real estate fund. You know, you and I go in and we chip in money and one of our partners launches a fund and we just kind of sit back, but we all share in the profits equally or pro rata based on how much money we put in. But if it's, you know, we both put in the same amount of money and you're kind of playing it differently and you're going to get a different return and I'm playing it differently and I'm going to get something completely different, then there's no common enterprise there. Just, it's, it's not, we're kind of all doing our own thing and any profit that we derive is really from our own efforts, not from somebody else. I just, that's, that's just a specious argument for, for the SEC to make there.

Moish Peltz [00:19:25]:
Okay, well, I, I'm sure that's where they're going.

Kyle Lawrence [00:19:28]:
Right, right. Probably.

Moish Peltz [00:19:29]:
Right. The common enterprises is.

Kyle Lawrence [00:19:32]:
Where else could they be?

Moish Peltz [00:19:33]:
That's, that's creating the smart contracts and, and selling things to people. Right. Even if that's not really what happened.

Kyle Lawrence [00:19:40]:
Well, it's, it's that, I mean, here I see the heading right here, you know, secondary trading of banana. It's the SEC presumably is taking the position that you started this thing and people got rich off it. You never registered with us. You know, you come in and register and you didn't do being punished.

Moish Peltz [00:19:55]:
Well, I mean, look, look, the two footnotes here, footnote four and five, you know, I think are pretty interesting. One, footnote four says it's the SAF contention that April 2021, the date of the upgrade of the smart contract, is the data securities offering. So I think that's really interesting. I don't know if we've seen other cases where the mere upgrade of a smart contract is the milestone by which security is now being offered, as opposed to the initial deployment of something or like an ICO or you know, a token generation event kind of thing, which I guess this kind of was because it did go from a pure NFT OpenSea smart contract to a more decentralized token enabled smart contract. Like fun, you know, fungible token enabled, you know, for the bananas. And then, and then footnote five, our understanding that the creation of a secondary market for Banana by community members is the basis for staff's concern that the banana yield, together with the availability of a secondary market. Trading for banana. And jumping to the end of the footnote, makes banana an investment contract under Howey has discussed, the three prongs required to establish a venture contract are not present.

Moish Peltz [00:21:09]:
So, you know, go back up to the heading that you're reading. But community members created banana liquidity pools on platforms like Uniswap and Sushiswap, enabling banana to be exchanged. So they're saying anyone can create a liquidity pool, which is essentially true.

Kyle Lawrence [00:21:27]:
But that's not CyberKongz doing it. That's the members of their ecosystem. How is that CyberKongz's fault?

Moish Peltz [00:21:34]:
Right. So CyberKongz has never sold banana, neither directly or on liquidity pool or secondary marketplace, never made any money from the sale of banana. Neither CyberKongz nor Mr. Redacted got compensated when others sold banana. To the contrary, they've provided banana for free at giveaways. Really? Into gaming system or organized airdrops.

Kyle Lawrence [00:21:55]:
It should read down before I start talking.

Moish Peltz [00:21:57]:
No, okay, we'll finish. The council was formed in July and other kind of people dedicated to building the expansive gaming ecosystem. All right, so again, let's play a little devil's advocate here, which is Cyber Callings did not sell the banana. They did not create the liquidity pools, but they did deploy the smart contract, the upgraded smart contract, knowing that banana would be kind of sprouting out of it and that people would receive that banana and that would be. They would able to realize a profit from that banana. Is it isn't that, Kyle, this. This pernicious economic reality that we're so wary of.

Kyle Lawrence [00:22:48]:
Well, it's certainly the economic. Great word. It's certainly something that the SEC talks about when they can't fit their square peg into a round hole. But I mean, you know, how. How far back do you have to go in order to claim, you know, that CyberKongz is responsible? George Washington formed our whole system of government. Let's blame him for everything that's wrong in. I don't need to be flippant about it, but seriously, like, it's like the more you read about this stuff, CyberKongz really had nothing, nothing. But they didn't have anything to do with the specific things that the SEC is alleging.

Kyle Lawrence [00:23:21]:
You know, these specific things, and the profits derived from them violated the securities offering. But it was the users who did it. Just because you set up the platform, this is the Silk Road thing all over again. You know, in a way, it's What? You created the platform and people exploited it. I just, I, I'm sorry, I can't get there.

Moish Peltz [00:23:41]:
Well, I, I, I'm gonna agree to disagree with you on the comparison to Silk Road here because of the, the factual assertions that came out in the conviction. But I, I'll, I'll save that for another day. I didn't wear it. I have my, my free Ross on on shirt and it's worth a plug. That day one is in like six days. So we'll see, right? Ross is in fact freed between now and our next recording.

Kyle Lawrence [00:24:12]:
We will see.

Moish Peltz [00:24:13]:
We will see. I wonder if that's one of those things that will be forgotten in, in the first few days. We'll find out. All right, so now we're getting into, so that, that was all, you know, pages one through five were all, you know, factual background, statement of facts. Right. So now we're jumping down into the argument section. And so here's what they said. There's all the facts.

Moish Peltz [00:24:37]:
That's the fact says CyberKongz sees them at least. And given all those facts, there's no cause of action under Section 5 of the securities act of 1933 as the genesis. NFT is not an investment contract under Howey. So here's the restatement of the Howey Test. Investment of money, common enterprise profit, solely derived of the efforts of the promoter. You know, facts and circumstance analysis where you look at the economic reality and totality of the circumstances to determine whether a contract exists. So I mean, here, here, here you go in terms of applying the, the facts that we'd already previously reviewed to the Howey Law discussed in the facts section. When the artist, you know, sold his NFTs, he was surprised they were sold.

Moish Peltz [00:25:35]:
That's funny, there were no sales in April 2021 when the staff asserts the security sale occurred, but rather a smart contract upgrade that included the banana utility token. So the NFT sales happened in March and then there was an upgrade of which no banana tokens were ever sold. Now, Kyle, tell me why CyberKongz should get the benefit of. I mean, this is something I've seen in other NFT contexts, which is there's NFT sale. The NFT sale happens at one point in time. There's some period of time, there's delay, then there's an airdrop of fungible tokens from, you know, by virtue of the non fungible token. So there, there is a sale of the to of the NFT and, and then there's no sale of the token, but there is kind of this attenuated connection between the sale of the NFT and then the receipt of the fungible tokens.

Kyle Lawrence [00:26:36]:
Right. I'm not. We would have to see what the SEC's position is. Again, we haven't seen their actual wells notice and they certainly haven't filed in action. That enumerates what the claims and their version of the facts are historically. And typically, when you have a securities or an investment contract, the SEC views the sale date as the date in which the issuer receives the money from the thing they sold. So if I sell you something and you give me $1 million, but I don't give you the token or the equity or whatever it is until a month later, it's still the date I get the money that they treat the sale as having taken effect. So again, there's just a lot of we don't know here in terms of what the SEC's position is.

Kyle Lawrence [00:27:19]:
Again, we're taking the cyber tongues at their word for what happened.

Moish Peltz [00:27:23]:
Right. And then under their telling. Right. I mean, to counter my own discussion there what there was no concept of. It's not like they said, hey, if you buy this NFT, you're going to get banana token in a month or two, just like, give us some time. Which I think what would be much more clearly correct, like, give me the money, I will give you a profitable return.

Kyle Lawrence [00:27:45]:
Much different analysis if that was the case. You are correct.

Moish Peltz [00:27:49]:
This, this art, this telling is give me the money, you get some art sometime later. Like, yeah, you know, it's like the SpongeBob SquarePants like and like a little bit later kind of, you know, put the slide here if we can do it. Oh, by the way, the community wants to, to help build a banana token because it's funny and we can start breeding our NFTs. Okay, so, so then, you know, this is, this is kind of their argument here, right? The proximity of the actual sales which occurred when persons visit OpenSea's and bought the Genesis NFT in March 2021 becomes clear that the staff is pushing the sale date back one month, understanding that his sales of NFTs, which are art in March 2021, are not an investment contract under. And they're doing that to rewrite history and argue the sales occurred later than they actually did by the staff asserting that something purportedly of value, the old smart contract, was provided in exchange for a new smart contract containing the banana utility token. But closer review makes clear that there was no payment of money, no one received any benefit for the upgrade, and nothing was of value. As received by CyberKongz.

Kyle Lawrence [00:29:03]:
Yeah, again, taking them at their word. It just you, you fail the Howey Test. And if you fail the Howey Test, that's kind of it. You have to satisfy each prong in order for there to be an investment contract.

Moish Peltz [00:29:15]:
Yeah, I mean it's interesting because they're saying each owner of the Genesis NFT received the same NFT on these smart contracts. So it's not upgrade, but they're not really getting anything different, at least for the NFT itself.

Kyle Lawrence [00:29:28]:
Another question.

Moish Peltz [00:29:28]:
I have envisioned investment contract as contemplation. No one paid any funds, no capital raise occurred, no pooling of assets, no promise the security would increase in value. Regardless these facts, the positions that smart contract upgrade is an investment of money under Howey, it does seem like a kind of a crazy, like when. When framed this way kind of crazy proposition.

Kyle Lawrence [00:29:50]:
And what I don't understand, and maybe they get into this later on in their response, but the SEC's mission, the reason they exist, is to protect investors from nefarious ne'er do wells in the space. There are a lot of them, people who mislead investors or who put out false information, pump and dumps, rug pulls. I mean, we see it every day, especially with meme coins that we, you know, we may talk about a little bit later. But here I just, I don't understand who was harmed. Unless I'm missing something that, you know, that they again, that they cover later. It doesn't seem like anybody was. Everybody was a willing participant. They knew what they were getting into.

Kyle Lawrence [00:30:29]:
Cyberkongz has been a very successful project. A lot of people have made a lot of money doing these things. And it doesn't seem like Cyberkongz did anything to run afoul of even the tenuous laws that they're trying to ascribe to this industry. I just don't get it. And I don't mean to be a shill for crypto, and I don't mean to say that the SEC is never right. There are plenty of times where they, where they get these things right. But on this one, I just don't get it. I'm sorry, I can't see it.

Moish Peltz [00:31:01]:
I can't really add to that. We're so far beyond the concept of investor protection that I don't even know what to say. All right, so moving on through the argument, there's no investment of money to upgrade this Genesis NFT smart contract. But you know, it just. This is the same thing, like, I love this argument, the technological update, like downloading an update to your Apple iPhone in no way resembles an investment of money. So upgrading your smart contract. Yeah, you know, if you analogize, it's like if you, if you, if it's a securities offering for Apple to say, hey, you're going from iOS 15 to iOS 16. I think we're actually on 17 to 18.

Moish Peltz [00:31:42]:
Like, like, that would be crazy. You just wouldn't see it that way. Themselves have zero intrinsic value and do not trade. Like, yeah, of course.

Kyle Lawrence [00:31:52]:
That's right. Yeah, you're right.

Moish Peltz [00:31:54]:
Right. So, okay, I'm curious.

Kyle Lawrence [00:31:59]:
I can't add anything to that. They're right. It's true.

Moish Peltz [00:32:01]:
It makes no sense. I'm like, okay, that doesn't make sense. So now we're getting into some additional detail on what a smart contract is and how it upgrades performed. I. I think I'll skip this for now. Unless. Do you have any.

Kyle Lawrence [00:32:16]:
There is another discussion of how for.

Moish Peltz [00:32:18]:
The smart contract upgrade, nothing was received by those who facilitated the update, you know, unlike even in Bitcoin or Ethereum, which are, you know, or in other cases pursued by the Commission.

Kyle Lawrence [00:32:34]:
At no point. See, I, I didn't own a CyberKongz, and I just don't see anything in here about how they pro. You were talking about it before. They didn't do any tweeting about, you know, earn banana token and buy the Lambo like that. They didn't do any of those things. So I just, I just don't get what we're talking. I don't mean to repeat myself and harp on the same thing, but yeah.

Moish Peltz [00:32:55]:
I mean, to be, to be fair, this is. This is Cyberkongz selling of it. So if, if there were like rocket ship emoji tweets, like, they certainly would not be highlighting them in their. In their Wells response.

Kyle Lawrence [00:33:06]:
Right, But I feel like if there was, there would have been an enforcement action three years ago, not a Wells notice today.

Moish Peltz [00:33:16]:
Touche. Okay, so again, no one paid anything for the upgrade. The staff's argument that the investment of money is a substitution of the old smart contract for an updated one is problematic as it renders meaningless. Howey. Or a smart contract update will now equal an investment of money since construction of Howey has no limiting principle. Indeed, if a smart contract update is an investment of money, anything related to the transfer or update of technology could be an investment of money. And any regulation of smart contracts also regulates smart contract. The blockchain industry.

Kyle Lawrence [00:34:02]:
I don't even know what to say, Moish. If again, we're taking CyberKongz at their word, if the SEC is trying to claim that the upgrade of a smart contract is an investment of money, you're right. I mean, you mentioned the Apple, the Apple phone and the upgrade of your iOS system on your phone. Now, everybody has committed securities fraud or half the country has committed series, half the planet has committed securities fraud.

Moish Peltz [00:34:27]:
Every software developer has committed.

Kyle Lawrence [00:34:29]:
What are we doing? Yeah, what are we doing?

Moish Peltz [00:34:32]:
So here, here you're seeing in footnote nine a citation to Judge Torres in the Ripple case and his evaluation of whether compensating employees and developers for the labor by payment of XRP was an investment of money. And Judge Torres concluded that those distributions of XRP did not satisfy Howey because they were, they were compensation. They didn't pay money or tangible, the final consideration to Ripple. To the contrary, Ripple paid XRP to them. So here, same idea. Those electing for the Genesis FT smart contract upgrade received 300 Mana tokens. They didn't invest any money, they received tokens. So there's no.

Moish Peltz [00:35:16]:
I, I think that's great.

Kyle Lawrence [00:35:18]:
Yeah. And just to be clear, there have been situations where the SEC has ruled that even if you receive something for free, there can arguably be an investment contract. We won't get into how that will work here, but in this particular instance, I don't see it.

Moish Peltz [00:35:37]:
Yeah. So this is, I think, one of my favorite parts of the brief. Again, they're analogizing the upgrade of a smart contract as akin to updating iOS on your phone, not an investment of money. And that SEC regulation by enforcement is going to hamper technological development, including simple upgrades to blockchain projects such as fixing bugs, adding futures, improving performance. Because if you treat a smart contract upgrade as an indicia of securities transactions, then basically, as we were saying, every company that does any smart contract upgrade has to think before they press commit. That upgrade is a security transaction. And it's just, it's not a tenable rule. And I mean, I don't think that also seems just now very clearly getting into the realm of every time you think about publishing code, which, which I think is free speech, because your code is code is speech writing.

Moish Peltz [00:36:37]:
And, you know, it's all the same thing. So every time you want to speak, just publish code, not even deploy code, but publish it. Like, you have to think, is this a possible, like, SEC violation? That just, it boggles the mind, reads.

Kyle Lawrence [00:36:51]:
To me like they are appealing to the incoming commissioner. Paul Atkins is stepping in. And when you and I've seen this a couple of times now in the response hindering development, stopping the United States Stopping blockchain industry from, from developing and growing and evolving the way it's supposed to. I mean that, that's right out of, you know, what Paul Atkins is going to agree with. We all know. And it almost seems like they're kind of, I don't want to use the word pandering. That's the wrong, it has a wrong connotation. But that seems like kind of what they're doing here and rightfully so.

Kyle Lawrence [00:37:22]:
I would do the same thing. That's smart. They should do that.

Moish Peltz [00:37:24]:
No, I mean, I think I agree. I agree. So I mean, this is part two of the brief which, you know, 15A of the exchange act where the redacted artist did not engage in broker dealer activity. So the staff has proposed charging the, the, the Mr. Redacted with the violation of section 15 of the Exchange act for acting as an unregistered broker dealer, you know, based on him as an artist creating the Genesis NFTs and receiving a 2.5% creator fee when an owner of the Genesis NFT sells it to a new buyer on a marketplace like OpenSea. So the transaction which the artist has zero involvement in except that he earns creator fees as creator of the artwork. So creator fees which may or may not be collected by the marketplace. That's right.

Moish Peltz [00:38:19]:
A lot of creator fees are optional. Our revenues and artists earns when his artwork is transferred to an owner, by an owner, to a new buyer. And they're a fundamental innovation of Web3. The staff seeing this as transaction based compensation. That is that there's some sort of facilitating a securities transaction commission. And so the creator's fees are akin to like a securities commission, which is a violation.

Kyle Lawrence [00:38:50]:
This is a little different than what we talked about at the top of this topic when I was going over what Section 15 is. Section 15 of the Exchange act is, you know, we don't, we don't have the benefit of the Wells notice or any opinion or any information from the sec. But what they're talking about here is, and this, the the rule is correct, I'm not saying what the, the Mr. Redacted done was wrong, but if you raise capital and you take a percentage of that capital as a fee and you're not FINRA licensed or licensed with the sec, that is a problem. And that is advice I have given to no fewer than 2,000 people in my career because they all try to do it. Everyone tries to do it. I say, you're not fineral license, you can't do it. Well, how are they going to find out.

Kyle Lawrence [00:39:32]:
It's like, that's not, it's like if I kill someone, what if they don't find out? No, you don't come to a lawyer with that. What if they don't find out? I tell you what the laws are. I'm not the, not the writer of said laws. I think it's just preposterous for them to even claim that. Well, it hinges on their assertion or their belief that these are securities transactions to begin with. If they're not, then there's no broker dealer violation. So it's moot. This just gets more and more silly the more you read it.

Kyle Lawrence [00:40:10]:
Not, not the response.

Moish Peltz [00:40:12]:
This is like, you know, I hope we're just kind of, you know, maybe this is just so slanted that the SEC's argument is not coming through. But the SEC staff viewing transaction based compensation as the hallmark of broker dealer activity based on the passive receipt of NFT creator fees. I mean I, I guess we can't be super surprised because I think this does call back to the stoner cats and impact theory which you know, those were not litigated but you know, the, the, the agreed orders that, that were the result of those did include in them the concept of those, those NFT creators did something wrong by virtue of them receiving the creator's fees. Here we're obviously seeing them pushing back on that, that notion and as we're reviewing it it's like, well, well, yeah, they're, they're receiving creator fees, they're. They're not brokering securities transactions. That just seems obvious.

Kyle Lawrence [00:41:15]:
Insane. Yeah. What a reach that is just a reach if ever there was one.

Moish Peltz [00:41:24]:
And so here, you know, this is the topic we were talking about before was well, let's look at the economic reality here. There is kind of a overarching entity, whether it's the CyberKongz LLC. And here you're seeing the Council of Kongs which promotes the CyberKongz's brand, answers questions related to this purchase of NFTs. I mean they are in a sense elevating the value of the NFTs and doing so in some concerted way, but then tying that to the establishment of a section 15 claim that they're somehow brokering securities transactions. I just, I'm not sure I see the link.

Kyle Lawrence [00:42:13]:
I don't see the link. And again, I just, I don't. I mean if, if these people were doing this, then I feel like any, any C suite executive at a public company is guilty of this because they get bonuses, they get bonuses based on Revenues. And based on this, and based on that, but they, they're not being hauled into an SEC tribunal, you know, in front of one of those ALJs. It's, this just doesn't make any sense to me at all.

Moish Peltz [00:42:43]:
Right. They're inducing like 15A under the SEC's theory, as explained by this argument, induces or attempts to induce the purchase or sale of any security and a regularity of participation in securities transactions at key points in the chain of distribution like that. I think that would describe almost anything in the digital asset space. It's like advising a client to do or not take some action that's somehow inducement of, of the purchasing or sale of a security.

Kyle Lawrence [00:43:19]:
What if we, as a law firm, a lot of law firms do this where if you have a client who's raising capital and they come to you and say, we're going to do a private placement memorandum and you're going to help us with it, and we say, okay, it's going to cost $30,000. You pay us half now and you pay us the other half when you finish the raise. And if you don't finish the raise, we waive the rest of the fee. Did we just commit a broker dealer violation according to the sec? Yes. And that's insane.

Moish Peltz [00:43:51]:
So now we're getting into the factors of whether someone's an unregistered broker. I'm going to skip through, you know, a lot of this, but, you know, it's. Are they an issuer? Were they involved in negotiations between the issuer and the investor? Do they make valuations? Do they make solicitations or recommendations? And obviously the brief here is answering no to all these factors. Do they negotiate price? Do they recommend the investment?

Kyle Lawrence [00:44:20]:
Which did they, as far as we.

Moish Peltz [00:44:21]:
Know, needs of the issuer. Did they possess customer funds or securities? Do they, do they advertise for investor clients? Right. So reviewing all the different factors that all the different leading cases highlight, they're obviously saying, and it's just completely unlike any of these cases.

Kyle Lawrence [00:44:43]:
Yeah, yeah. Again, I just, I don't understand the timing of this. I don't understand why they would just, why they would take such a, such a tenuous position on a high profile unless they have some smoking gun that we don't know about. And there's obviously some external factors in play here because there's something that's just not adding up to me. I don't think the people who work at the SEC are stupid, and I know you don't either. And they're not. These are obviously smart people who understand these laws better than most, than most people. But I don't get this.

Kyle Lawrence [00:45:25]:
There has to be something missing here, Moish. There has to be something. I mean, obviously CyberKongz isn't going to be like, yeah, we screwed up this one thing. They're not going to do that given the timing of the new administration coming in. But I just, there's definitely a missing piece here.

Moish Peltz [00:45:41]:
Well, look, I think when it was first kind of publicized that the SEC was, you know, an issue to Wells notice to cybercrime, everyone's like, wait, what was last month? Yeah, yeah, so that was back in December. But now that we're, I mean again, we're only seeing one side of the story and, and although, you know, I will say there have been other SEC actions and you know, crypto enforcement actions where we've, we've reviewed the SEC allegations, we've reviewed the response and not, I mean us, the public have said, oh, that doesn't look good. But then judges have said no, this, this is basically garbage, like out of the court. So like, nice. You know, I, I, I don't, I don't want to say like just because we haven't seen the other side, like there's, there's no way this whole thing is not, you know, like it could just be like, oh, the SEC is like kind of, kind of gone crazy town here. But giving them the benefit of the doubt, you know, let's wait until we see, you know, actual allegations from them or maybe they'll just drop it after this. Who knows? So again, right, just to sum up the argument here, there's only two of these factors that are even applicable. You know, one is that the issuer is CyberKongzs and two, that the, you know, the redacted artist received compensation in the form of commissions as opposed to a salary.

Moish Peltz [00:47:04]:
I think that's just based on, you know, as money came in, he got some percentage of that. So that's what I assume they're they're referencing here. But then that's completely untethered from all the other people buying and selling the NFTs, all the other people volunteering their time to build the cyberconics gaming development. And so, you know, the redacted artist is non securities business, was unemployed by anyone who sold security, did not receive compensation for affecting security transactions. He did not even sell securities in the secondary market. And the creator fee was based on the creation of the NFT art, not to the sale of securities. So the reasons the commission so declined to Proceed. I mean, I, I just didn't.

Moish Peltz [00:47:50]:
I think they were a little bit more sensitive to the, the first cause of action that 15 a cause of action seems that way.

Kyle Lawrence [00:47:58]:
Well, this one's a little more clean cut and dried, it seems. Ellie, again, assuming that everything is true that reading here.

Moish Peltz [00:48:05]:
Yeah. And then there's just a nice little list of additional considerations here, including that NFT is unique. Yeah. So NFTs are non fungible. They're not fungible. It's like each one's collectible and its own thing, you know. Now they're completely still be seen in other. The sense we've spoken about previously from the sec, Commissioners Purse and Uyeda, from Stoner Cats and impact Theory and other dissents that, you know, physical collectibles like Star wars, baseball cards, Beanie Babies have not been enforced by the sec.

Moish Peltz [00:48:40]:
Artwork like People's Auction has not been enforced against. They're actually quoting here the dissenting opinion where the application of securities laws makes a lot of sense, discourages content creators from exploring and financing artists, writers, musicians, filmmakers, others. The SEC should decline to regulate art markets. And NFTs are digital art protected by First Amendment. So this all calls back to, you know, even, you know, prior guests of the show, you know, Jonathan Mann and Professor Fry, you know, basically suing the FCC saying, you know, art is not a security.

Kyle Lawrence [00:49:23]:
Right.

Moish Peltz [00:49:24]:
This ties directly into that argument. So here we see even a little further right. NFTs have not been the subject of interpretive guidance for the SEC, nor congressional legislation. And the new Congress formed in January 2025 has identified cryptocurrency legislation as top priority. So I think that's saying, well, if you're going to enforce, at least wait till.

Kyle Lawrence [00:49:46]:
Right, right.

Moish Peltz [00:49:48]:
But I think it's a good point. Right. So the interpretive guidance we've received.

Kyle Lawrence [00:49:52]:
Absolutely, yeah.

Moish Peltz [00:49:53]:
Is really about. I mean, to the extent we have any interpretive guidance and we can, we'll talk a little bit later in the show about the 3rd Circuit's opinion on the SEC's guidance or lack thereof. I don't think any of it's been on NFTs.

Kyle Lawrence [00:50:10]:
None that I've seen. That's right. We've only seen enforcement actions.

Moish Peltz [00:50:14]:
Enforcement actions, Right, right.

Kyle Lawrence [00:50:15]:
That's it.

Moish Peltz [00:50:18]:
I see they, you know, Commissioner Purse saying, yeah, you know, lay out the law and if they violate it, you can bring enforcement actions, but don't use enforcement actions to tell people what the law is. The word board ape in there somewhere.

Kyle Lawrence [00:50:37]:
You had to get it in somewhere.

Moish Peltz [00:50:38]:
They found a way aggressive Regulation, biased enforcement actions against NFTs and other cutting edge web3 technologies endangers America's legal lead in cutting edge crypto and blockchain technologies, web3 social networks, and the creation of the next generation of unicorns. I think this, Kyle, gets back to your point about, you know, giving some bait for your audience.

Kyle Lawrence [00:50:58]:
Yes.

Moish Peltz [00:51:00]:
And here you go, Kyle. Right. I'll let you kind of work on this last one.

Kyle Lawrence [00:51:04]:
Yeah. Paul Atkins, his quote. If the SEC were more accommodating and would deal straightforwardly with these various crypto firms, I think it would be a lot better for crypto companies to work directly in the US Instead of going overseas. There you have it. And I feel like they took that quote to heart in crafting this response, and I don't disagree with their position. Again, I know we said it a thousand times, but we're taking their side of the facts as gospel. But we have nothing else to go on, as we have for the past several years in dealing with the sec. We don't have anything to go on from the SEC other than your security enforcement action.

Kyle Lawrence [00:51:45]:
It's, it's like Plinko. It's ridiculous.

Moish Peltz [00:51:49]:
Yeah. I mean, I think this is, you know, one, a really encouraging quote from the incoming SEC chair, Paul Atkins. I think this, this is kind of the whole idea here is you And I are U.S. attorneys. You and I work with a lot of really creative, entrepreneurial, bright founders based in the US they have really amazing ideas. They want to do them here. They want to employ people here. They want to pay taxes here.

Moish Peltz [00:52:20]:
They want to, you know, raise capital and make people money too, in the right way. But they're not trying to screw investors. They're not trying to do anything. They just want a pathway to, to, to do these things.

Kyle Lawrence [00:52:33]:
Yeah, yeah. And, and the people who are doing something wrong and are violating the securities laws, there is still a framework in place to punish those people and stop them. You don't. They're not mutually exclusive. You can still punish the bad people and let the good people build an industry and have US jobs and make made in America mean something. It's, it's not a zero sum game, guys. It's not hard. I don't get it.

Kyle Lawrence [00:53:00]:
Why is it so hard for you?

Moish Peltz [00:53:04]:
Well, you know, we've got, we've got six more days to see if things start changing around here.

Kyle Lawrence [00:53:08]:
So there you go. That's it.

Moish Peltz [00:53:09]:
Yeah. So, you know, conclusion, respectfully request the commission decline to file former charges in the above caption matter. And there you have it. And we'll credit Scott Anderson and, and Max Dillendorf for, for drafting this argument. So that's it.

Kyle Lawrence [00:53:27]:
Well, more SEC fund Moish. Not to be outdone in the ongoing Saga of SEC vs Coinbase, the other day a federal appeals Court directed the U.S. securities and Exchange Commission to provide a more detailed rationale for rejecting Coinbase's request for specific regulatory rules tailored to the crypto asset industry. Court found the SEC's previous response inadequate and lacking substantive reasoning. Coinbase had argued that the lack of clear regulatory guidance from the SEC creates significant challenges for compliance in the crypto sector. Basically, we were just talking about the company highlighted that traditional securities laws are not well suited to the decentralized and unique nature of blockchain based assets. Moish we just spent a lot of time talking about CyberKongz. This stems from the case from 2023 that the SEC was suing Coinbase for operating as an unregistered securities exchange.

Kyle Lawrence [00:54:21]:
You know, what do you think about this? Is this a bellwether for what's going forward? Is it just a kind of striking down of the SEC before the new administration takes over and saying, guys, you got to give us something to work with? What's your initial thoughts on this case, on this decision?

Moish Peltz [00:54:38]:
Yeah, I mean, why not all the above? And why not also just a continuation of the, the judicial branch kind of saying, well, sec, if you're not having a consistent kind of reasonable, viable approach, like we're going to call you out on it. I, I think this is really fascinating because the SEC has been saying the, the, the laws of the, of the rules of the road are very clear. All you have to do is follow, you know, whatever guidance is out there and on that basis we're free to enforce and do all these other things and people should know that what they're doing is wrong. And then Coinbase said, well, can you give us a little bit of a Hint? And the SEC's answer was just basically, no, we don't need to, we don't want to. We'll get around to it if we feel like it. And now it's interesting, the Third Circuit, which as Coinbase had asked the Third Circuit to basically compel Coinbase to actually create that rulemaking. And the 3rd Circuit didn't go that far.

Kyle Lawrence [00:55:47]:
Right.

Moish Peltz [00:55:47]:
They merely said you need to give a better explanation for why you're choosing not to because your explanation of I don't feel like it is inadequate and arbitrary and capricious. Right. So, I mean, look, I think that ties Directly into what you're saying though, which is, does all this kind of lead into now the new administration? And here, you know, this was issued yesterday, January 13th. This, this, this opinion we got about a week before the new administration takes over and Paul Atkins, who we mentioned earlier, is taking over. And so the, it seems pretty evident that the people that are going to answer the 3rd Circuit's query here to more fully explain why they have decided not to issue regulation might be people among the new administration.

Kyle Lawrence [00:56:41]:
It's funny, when we think about these enforcement actions and the various lawsuits that the SEC has brought against Coinbase and Ripple and some of the other bigger players and smaller players, we always refer to it as a David and Goliath kind of scenario, but Coinbase is hardly a David in this kind of situation. But what's really interesting here is that one, we have the new administration taking over. It's, it's all eyes on the SEC and what's going to happen under the new regime. But if Coinbase wins this suit, I feel like you're going to see all of these non fraud related cases just evaporate pretty quickly. It's hard to see them continuing.

Moish Peltz [00:57:19]:
Really cool or hear me out, Kyle. There will be actual guidance and legislation which you can like follow and, and do things the way you know you want to and actually make an honest buck.

Kyle Lawrence [00:57:31]:
Hella you say? We'll see. Looking forward to it. To brave new world, folks.

Moish Peltz [00:57:38]:
Buckle up, we'll talk to you on the other side.

Kyle Lawrence [00:57:41]:
That's it. I mean, I guess this is our last recording under Gensler Gensler's watch. So here we go. All right, well, I think it's lightning round time, my friend.

Moish Peltz [00:57:53]:
All right, so the cfpb, which is Elizabeth Warren's Consumer Financial Protection Bureau, proposed new rule requiring U S. Cryptocurrency companies to reimburse customers for funds lost due to hacks or unauthorized transactions. So this would intend to align crypto wallets with traditional banking protections. Now Kyle, there's, there's one big difference, which is that when your funds are with the bank, this is like a regulated custodian. And you know, presumably they can have rules and track them where the money goes, but where it's with a digital wallet, kind of not really a traditional banking institution. Should those same rules apply?

Kyle Lawrence [00:58:38]:
Well, there should be some rules on it because you know, we get a lot of these phone calls from people who have been hacked or you know, whatever it may be. Just the other day somebody called me up, they had their funds on Coinbase and Now the funds are gone. They can even track it to the bank, but there's really nothing they can do about it. I do think it's good that there would be some mechanism in place to reimburse people. However, there needs to be some rules, because what will invariably happen is somebody will give out their seed phrase or they'll respond to that email that they get from Coinbase, you know, staff or whatever. And when their funds get stolen, it can't just be like, well, okay, I should get my money back because I made a mistake. There needs to be some rules in place governing it. I don't know where that line gets drawn, but it can't just be for people who f up and get their money back.

Moish Peltz [00:59:26]:
It's almost Kyle, like, the regulations should be tailored for the industry, which they're regulating.

Kyle Lawrence [00:59:32]:
Oh, he's cooking with gas tonight, folks. All right, well, next up, something that I greatly appreciate is University. University of Southern California linebacker recruit. And I'm going to butcher his name. I'm very sorry, mate. Tagoa, I. I don't know. Has made history by becoming one of the first college athletes to accept a portion of his name, image and likeness and il earnings in Bitcoin.

Kyle Lawrence [01:00:00]:
Partnering with the global bitcoin app Strike, this groundbreaking deal reflects a growing trend of athletes embracing cryptocurrency for financial growth and stability. And I love this because I'm not a college sports guy. I'm from Long island, and we don't care about college sports. But it's a great thing that college athletes now get to somehow monetize themselves. While historically the NCAA just made a bazillion dollars and treated the players like cattle. That's my soapbox for the night. So I think this is. I mean, the nil stuff is great in general, but to see cryptocurrency enter the fray I think is fantastic.

Moish Peltz [01:00:34]:
Yeah, look, I'm from South Florida, and all we have is college sports. Like, we don't have anything else except for, I guess, with the Miami Heat. But Dolphins are not a real team. Neither are the Marlins. Panthers are cool, but, you know, um, uf not South Florida, but, you know, I went there. The nil thing people are angry about because it flips on its head. The whole idea of, like, amateur athleticism. But the previous concept was not sustainable.

Moish Peltz [01:01:05]:
NIL is obviously the future and how things are going to work. And I. I think this is great. You know, the college kids are going to take their money in bitcoin just like the NFL players did. And who was it Kyle, that, that took all their NFL salary and bitcoin and everyone made fun of them until like 2024. And then all of a sudden he goes, ha ha, look, look what happened. But we have a few of those now.

Kyle Lawrence [01:01:29]:
Yeah, we do. Who, who was the first one to do it? Do you know the top of your head? We could flash it up on the screen. I don't remember.

Moish Peltz [01:01:39]:
Russell, this is content right here.

Kyle Lawrence [01:01:42]:
I don't even know who that is. I don't follow the NFL.

Moish Peltz [01:01:46]:
Well, we're gonna get excoriated by fire. So he took half of his 13 million dollar contract in Bitcoin back in 2020 and he's done pretty well, I would think.

Kyle Lawrence [01:01:57]:
That's using your noodle.

Moish Peltz [01:01:59]:
All right, onto our next topic. The end of year 2024 report from Chainalysis has been released with some staggering numbers, including that cryptocurrency platforms have experienced a significant increase in hacking incidents. The total losses reaching over two and a half, $2.2 billion, 21% rise from 2023. Included in that are North Korean affiliated hackers who are responsible for at least $1.3 billion of the CEPHs. That's 100% increase from the previous year and over 61% of the amount tracked. So, Kyle, what do you think about this surge and does this underscore the escalating challenges in securing digital assets against increasingly sophisticated cyber actors?

Kyle Lawrence [01:02:47]:
What's the refrain? That the criminals are always two steps ahead, especially when it comes to tech and cyber theft and all that. So even if you build a better mousetrap, they'll find a way around it before you even have your mousetrap built or one of the things. But obviously we need to safeguard our assets. Obviously we need protocols in place to protect people. But I'm curious if the increase in hacking incidents and the total losses is consistent with the inflows and the new users and the new wallet, wallets that have been created and just the inflows with ETFs, just people getting. I'm curious to see where that line and where that graph is, because maybe this is insignificant relative to the, to the, to the other side of the coin. Maybe. I don't know, I'm just kind of spitballing.

Moish Peltz [01:03:33]:
Well, we'll have to have some of our friends from Chainalysis who on to answer some of those questions. It's an interesting point. I think it's also partially tied to attribution, that as time goes on, they're able to identify and give attribution to different kinds of transactions where they may not have been able to do that a year or two ago. So, like, the numbers also rise. Like, if you look back at, like, 2022 numbers, there's more attribution because you're able to kind of play backwards. Things, you know, happen from there.

Kyle Lawrence [01:04:01]:
Yeah, good point. Well, a Meme Coin feel good story, which. Which I'm. I'm happy to share. In December, Si Ki Chen's plea for donations to fund research for his daughter Mira's rare brain tumor inspired the creation of the Mira Meme Coin on Pump Fun. The token's market cap surged to 80 million, which helped raise over 1 million for the cause. Of course, obviously, its value later declined by 80%. It is a Meme Coin tiger can't change his stripes.

Kyle Lawrence [01:04:31]:
But this event highlights the real potential of cryptocurrency communities to mobilize resources for charitable initiatives. And when you have something like what we have going on right now in Los Angeles, and our hearts go out to all the people affected. I have a lot of friends who live in SoCal. I know you do, too. We have an office in Southern California. You know, this is what crypto can do, and we need more of these stories. You know, it's. It's great that we could talk about Dog with Hat and the people making, you know, billions of dollars, and that's all wonderful, but this is a great use case, and it just.

Kyle Lawrence [01:05:04]:
It warms my. My. My heart. It does, Yeah.

Moish Peltz [01:05:07]:
I mean, you love. You love to see it. I love to see the crypto being used for good. And this is an example of that. Even if an $80 million market cap resulted in about a million dollars of liquidity and a later 80% crash, for a brief moment in time, you know, some charity happened. And yes, I share your sentiments on our friends and family and colleagues out in California and wishing the best to everyone out there. All right. The IRS has finalized its broker rule.

Moish Peltz [01:05:40]:
So the IRS finalized regulations requiring certain DeFi platforms to collect user information, report transactions similar to traditional financial institutions. These rules are now set to take effect in 2027 and mandate that DEFI brokers gather KYC data to ensure tax compliance. So critics, such as some people on the show argue that these requirements could undermine this decentralized nature of DeFi and impose significant compliance burdens on developers and platforms who are not in a position to bear those changes. So, Kyle, now that the rule has been finalized and it's set to take effect, although on a delayed basis, what do you think is the incoming Administration going to have any hope to change some of this?

Kyle Lawrence [01:06:32]:
I would imagine they'll have a thing or two to say about it. You know, I'm of two minds of this because we've seen things get over regulated and it just crushes the, you know, the intent for why the thing was formed. However, I like that my garbage gets picked up and I like that roads get built and I like that I have water that doesn't poison me. And you need to pay for those things and you do need to have some tax compliance, you know. But there is a line that gets drawn. I know that that's an unpopular opinion and you can't have people just cheating on their taxes willy nilly left and right. But there needs to be, you know, some middle ground there, I think.

Moish Peltz [01:07:11]:
Right. I mean, again, it, it would hopefully be compelled by regulation that's, that's targeted to the industry that it's regulating and not just heavy handed KYC data for the purpose of, of gathering that data.

Kyle Lawrence [01:07:23]:
Correct. I agree.

Moish Peltz [01:07:25]:
All right. The big news of late is AI tokens. So Kyle, we've seen issuance of dozens, hundreds, maybe even thousands of AI cryptocurrency tokens. And then one of the ones I was thinking about was AI16Z, which is a humorous take on a 16Z and Teresa Horowitz's fund, AI16Z and the Eliza development, or at least a white paper which outlined their plans for an AI cryptocurrency ecosystem, including things like launching a blockchain to enable AI agents to talk to each other and transact on the blockchain. But Kyle, my question for you is, who bears liability when all these AIs are deployed in a decentralized manner and then they just take on a life of their own?

Kyle Lawrence [01:08:23]:
It's interesting. The question I have is, did AI write the white paper? I'd actually be curious to know about that. It's a great question and I think it's very murky. I mean, there's the legal concept of respondent superior, which is you kind of shield your employees from liability. When they mess up your employees out in a company car and hit somebody, you protect them. You know, is that the same kind of thing? You know, if the AI runs amok, are you ultimately responsible for their actions? You know, I guess that depends on how you program it or how much oversight you have over it. It would be wildly irresponsible if, you know, one of these AIs. You know, I've just.

Kyle Lawrence [01:09:02]:
Forgive me for, for being, you know, not, not, not the Most tech savvy person. But, you know, it's like if they launch nukes in other countries, you're like, well, I didn't tell it. I just told it to order pizza and trade some tokens. Like, how was I supposed to, to know that's not going to fly if something really goes wrong?

Moish Peltz [01:09:18]:
Right? And I think as of yet, you know, there's been like, funny things and like, humorous things and things that have kind of gone off, you know, the rails, but there haven't been any, like, oh my God, kind of explode in your face kind of thing. So we're lucky so far. It'll be interesting to see once an AI does. You know, I think, I think cryptocurrency is where AI is going to be like, hey, I've got some money now. Let me, let me do something fun with it.

Kyle Lawrence [01:09:43]:
Yeah.

Moish Peltz [01:09:44]:
And when you see that go awry, it's going to be interesting. And I think we're predicting it here that that will ultimately happen. It's just a question of not, not if, but when.

Kyle Lawrence [01:09:54]:
I agree. Well, that wraps it up for the first edition of Block and order in 2025. Happy New Year, everybody. And I know it's January 14th. I don't care. I'm still saying it. Very special thanks for joining us. Don't forget to like and subscribe to our channel.

Kyle Lawrence [01:10:07]:
Follow us on all our socials. Links are down below in the show notes. Remember, this show is meant for information and entertainment purposes only. Nothing that we say is intended to be construed as legal or financial advice. Please hire your own attorney if you're going to take the plunge down the rabbit hole. Neither the discussion of nor the fact that Moish and I may own some of the assets that we discuss on the show is meant in any way to serve as an endorsement of such assets. A very special thank you to producer Shaun, who paired with us through a pretty lengthy recording session tonight. So on behalf of Moish Peltz, I'm Kyle Lawrence.

Kyle Lawrence [01:10:39]:
Take care, everybody.

Moish Peltz [01:10:41]:
See you next time.