E161: Bitcoin Compliance: Everything You Should Know with Harsha Goli - Co-Founder of Magnolia

Jacob Brown (00:01.603)
Harsha, how you doing today, my man?

Harsha Goli (00:05.452)
I'm doing great, truly great. And yourself?

Jacob Brown (00:08.865)
Also excellent. This one's gonna be fun. I gotta be honest, there's a, sometimes I know the people I'm talking to, because I've seen them on the time in a while. Not only is your topic I'm super green at when it comes to Bitcoin compliance, and we're gonna dive into, but actually besides your pretty legendary Twitter bio, you've done some dope shit. And your PFP that I see with that kind of the sideways hat, I don't know much about you almost at all. So.

I'd love to start by just kind of like a brief overview of some of your background and how you got into the Bitcoin space.

Harsha Goli (00:41.262)
Yeah, dude, totally. So I used to be anon for a while, right? Which is why like, you know, lot of my shit just doesn't exist, right? I've been trying to change that and really kind of embrace my online like identity. So like my, have like a real website now that's, you know, exactly my kind of vibe. It's Arsh.bot, very simple. I got into Bitcoin like 2014, 2015, just kind of like buying things online. And, you know, I kind asked myself at one point, you know, why, why does a string of things result in like, you know,

like value being sent from this iPhone app to that thing over there. And yeah, that was like a rabbit hole. Turns out it's really cool why it happens. And I spent some time just kind of really digging into how wallets worked. from there, well, I needed a job because I was a college student, needed internship money. So I got a job at some companies here in Atlanta. And yeah, from there, it's been just kind of a journey. So I worked at BitPay.

On a bunch of stuff actually, I was responsible for spinning up the SegWit 2X testnet. We had like 100 Raspberry Pis all with USB miners. It's actually just mining away. That was kind cool. I didn't really know anything about the politics of the block size wars. knew everything technically about it, but from a politics standpoint, I just didn't have really any opinions. From there, know, like BitPay was really cool, but...

After that I started doing like a lot of contracting got really into like a lot of random projects like Help build like a block explorer called block explore comm and it's not a funks Got really into like, you know mining operations as well and eventually Met some really cool folks who are booting up fold again. And so we booted up fold I was one of the founding engineers when fold came back live sometime in like 2018 and Yeah, like road

Roadfold helped build all their payment infrastructure for a long time, which is awesome. Shipped Lightning helped ship Bitcoin, a couple other things as well. And yeah, and from there, it's just been kind of a journey. I at some other places as well, and some really cool projects. Contributed to LND, I just honestly have a ton of different projects online. I just got really into contributing to open source. There was one, I've only ever worked one non-Bitcoin job, and that was in like...

Harsha Goli (03:01.678)
the streaming industry. that was the only time I didn't work in Bitcoin. was like as a recommendations engineer, was pretty goofy. But yeah, I've been all over the place. Lightning Labs and Voltage and oh, where else? A couple other places. Oh, Swann. Yeah, a couple other places. Yeah, I've been in Bitcoin career my whole life.

Jacob Brown (03:18.489)
Sweet.

That's cool, mean, saying I've only worked one other job besides in the Bitcoin space is kind of a dope flex. So that's cool. And just to make sure your background is heavily in kind of like the engineering tech side.

Harsha Goli (03:26.792)
Hahaha.

Harsha Goli (03:35.756)
Yep, Engineering Protocol Devside. Yeah, if you guys go to my website, there's like no JavaScript and barely any CSS. Like, I'm not a front-end engineer at all. I like working on the hard problems.

Jacob Brown (03:42.797)
Hahaha

Jacob Brown (03:47.48)
Got it. Very cool. and then eventually jumped into this thing called Magnolia. And I think a good chunk of this will be kind of in the high level. What is compliance and like the, like banging your head against it? What does this mean for founders? But I want to get a context of like what you're currently building. as it kind of like fits, we can jump in and double click on your company. So yeah, what is, what is this a building blocks thing you're building with Magnolia?

Harsha Goli (04:17.122)
So if you're someone in the industry, you'll resonate with what I'm about to talk about. Throughout my entire time in the industry, especially at Fold and Swann, there's always been the boogeyman in the background of what are we legally allowed to do and how do we legally do it. And that's always felt like these big cement walls that dictate our entire product roadmap and invisible lawyers always say no and someone online stokes fear and you just can never actually deliver what it is you, you as an engineer.

want to deliver to your end users. That's always just been the case. It's the status quo. And I got to a point, like while I was at Swann, where I just kind of had enough with that mentality, right? Like Swann had been in this position where they were just flipping between these custodians and it was just complete madness, right? Not only madness for the end users, right? Who were just getting like, you know, like, my coins safe or not, right? Like that anxiety, but also just madness for the Swann team as well because

you've got this entire incredibly talented engineering team that's just solely focused on keeping the lights on and making sure that the custodian is going to like operate effectively, right? So that's situation where not only are you boxed in by the regulations and general anxiety of like, know, legal side of things, but the people that you rely on to take care of that kind of stuff, you can't really rely on them either, right? And so like very specifically what I'm referring to is interacting with the Fiat rail system.

and interacting with Bitcoin in a manner that is kosher by the US government. That's specifically what I'm referring to. There's a blanket word called compliance on this, right? And that just means complying to the laws that in effect. And over the last four years, that's been called EBS because there have been no laws. So we've all been just trying to guess what the laws could be, because the SEC has just been enforcing these laws without any actual precedent and them enforcing the laws.

becomes a precedent. It's been just complete madness for last four years, right? And so not only is there just a complete lack of clarity on what these laws could be, there's just been also no one who could really help guide anyone in the mid to small tiered area through this lack of clarity. So it's just been, yeah, so started really Magnolia to solve that problem because everyone suffers from it.

Jacob Brown (06:36.74)
sounds like a huge problem. It's also one of those things that's, it really hurts innovation and it really hurts, it becomes like a centralizing force because the small man can't afford it unless he has like someone in their corner. I wanna make sure I understand the pieces here though, cause like I see there's like the regulatory uncertainty or like lack of clarity and that's already like, you know.

this morning Coinbase announced something with CBTC and Nick Morpho, this lending product. And it started up a mini debate in some circles of like, is it a taxable event? Does that make the product deal away? And some of us, and I'm kind of in this camp currently, but I'm also a noob, so good that you're here, is like, it's not a taxable event, but you gotta fight it to kind of plead your case. Others think it definitely is. So that's like the regulatory side. And then the other side, I'm not sure what the other part you're saying is that this is, what is this kind of like tech?

and like team building thing you're mentioning. I don't fully grasp that one.

Harsha Goli (07:34.762)
So the actual core services that we're referring to here are on-ramping, so interacting with fiat funds in any way, shape, form, like custody so that the business itself, the Bitcoin business can interact with Bitcoin. Actually, most people are not compliant in this way, but if you are going to interact with Bitcoin, you actually need to have licenses to do that. Most people don't do that. It's not well enforced because it's a state-level problem, not a federal-level problem.

this kind of licensure is enforced at the state. So certain states really care a lot, like New York and California, which is why you really often, including with the Coinbase announcement, see that this excludes New York, right? But a lot of other states don't really care that much. And they have much lower barriers to entry. This is called MTL licensing, right? So anyway, on-ramping, custody, and then brokerage to actually facilitate the fiat to...

Jacob Brown (08:03.917)
Hmm.

Harsha Goli (08:32.428)
the costing side that's just converting between fiat and Bitcoin.

Jacob Brown (08:35.629)
I see, okay. And you said MTL, I think that means money transmitter license. And then there's, is there MSB, is the other one I hear floated around a lot?

Harsha Goli (08:40.578)
That's exactly right.

Harsha Goli (08:45.12)
Yes, so MSB is the federal license, it's a very low bar to achieve. The form is like two pages. It's not too crazy. That's really just registering with FinCEN, basically saying like, I exist. You know, like, I'm going to comply in these ways.

Jacob Brown (09:01.921)
Okay, before you delve in the weeds, you've touched on it, but I want to put a nice frame around this idea of the term compliance, so we can kind of unpack it. So like when people say compliance in the realm of Bitcoin, what is kind of in that domain?

Harsha Goli (09:11.406)
Mm-hmm.

Harsha Goli (09:22.024)
They basically want to make sure that whatever rails they're interacting with are kosher by the government. That's specifically it, right? When you interact with fiat in the US, it's by definition compliant and you kind of have that expectation going in. But Bitcoin kind of escapes that rail system, right? And generally crypto does too. And so there's a lot of it that is not compliant that you can still perform. It's just that

Lots of institutions don't want to interact with those systems that are not compliant. And so all the systems that we've got that we're building up, there is an air of compliance on all of it. But we're not really building it to be compliance. We're building it because people need the tools. The tools just are also completely legally regulated and also are ethos aligned. But the tools are what people really need.

Jacob Brown (10:17.913)
Okay, so compliance is anything that's kosher by the government's it's legal and regulated according to all the laws that are currently applied. It only applies when we talk about it mainly because the US is such a broad market, when we talk about the US, international, it changes drastically, I'm assuming.

Harsha Goli (10:17.996)
Mm-hmm, compliance is just a flavor.

Harsha Goli (10:39.99)
Yeah, depending on the jurisdiction, right? So Europe just released a very large framework that just went into effect in Europe called MICA, and that's like a whole thing and a half. So that's a different set of rules, too.

Jacob Brown (10:49.827)
Mm-hmm.

Jacob Brown (10:53.56)
Got it. And so the US has kind of like been tricky because they've been enforcing it through like legal action and not giving us clarity. MICA sounds like the current best standard for at least it's clear, even though people can fight about what the rules are. And that's like kind of like the best we have as far as you pass or fail.

Harsha Goli (11:11.308)
Yes, exactly. But from the US business point of view, we just don't really know until we see other companies go through the gauntlet because in the US, we're a little bit shell-shocked, to be honest with you. We don't trust the new regulations and new frameworks until someone goes through it because you just don't know anymore. Silvergate was a very well-regulated bank that was federally chartered. Or it was chartered. I actually don't remember if it was federally chartered. I assume it was.

But then, you know, the SEC forced them to shut down and then gagged them from talking about it, right? So like complying in the US doesn't mean you're all clear.

Jacob Brown (11:50.042)
Got it, got it. And does this, how does this change with being entity here, like you have a Delaware C Corp, versus you're outside of that, but you serve US customers, because that's one thing I've seen is like you domicile somewhere else, but if you serve US customers, as soon as you start to do that, you're kind of on the hook, it seems like. So people geo block, what's the interplay here?

Harsha Goli (12:14.478)
So in the US, we're US based for a couple different reasons, it doesn't really matter actually where it is you're based necessarily. It matters what customers you interact with. So Polymarket, for example, they don't have any licenses to operate in the US. And so as a result, they try to block people from interacting with them as much as possible. And they do a pretty good job of it. But they could be based in the US. They could be based not in the US, Panama. Doesn't really matter though.

You know what I mean? Because they just don't have the licenses to interact with US customers. That's the important part.

Jacob Brown (12:48.066)
Yep, yep, got it, okay. Cool man, we've touched on a bunch of topics. What do you think, from your point of view, what is like the biggest headaches or like, I'm not sure the best way to word it, if you could like get clarity on one topic, what's the biggest one messing founders up right now?

Harsha Goli (13:07.682)
man, honestly so much, like just like the entire conversation, you know, like from top to bottom, because like, you know, like all these different, like regulatory bodies, they put out like different guidelines or briefs that are like completely at odds with each other, like the IRS document that we were talking about on Twitter, that one is incredible, truly incredible, like a masterpiece really, and just messing up our entire industry because they go through and they're like, so our friends over at FinCEN said this,

Jacob Brown (13:10.541)
Hahaha.

Harsha Goli (13:35.244)
That's horseshit. Our friends over at the SEC said this, we don't believe in that. They just go through and just said, all this precedent that we built up, no, we're gonna do it like this. In fact, we're gonna do it like this in a way that the names that we're associating don't even make sense and we just don't care. Like for example, they called front end like app steps. They're considering them brokers, not because they act like brokers, but because they're the most convenient party in this whole system to treat as a broker. It's like, okay.

Jacob Brown (13:39.193)
Mm.

Harsha Goli (14:04.366)
that this is very difficult to deal with as an industry. That's one example. Another example is we've all dealt with debanking. It's hard to get a bank account in Bitcoin or crypto, even a little bit. From an operational point of view, starting Magnolia, we had to go to two or three different banks. That's just the way it is right now. getting your...

your Bitcoin business to actually interact with folks with just a credit card. That is so difficult. And the assumption right now is you just don't do that. You can't do it. It's very difficult to do that. Don't worry about it. So your addressable market is already pigeonholed. Right. So if this is Bitcoin we're talking about, which is massive. What if it's not Bitcoin? What if it's a layer two on Bitcoin? What if it's lightning? What if it's, you know, like something built on Strata or some other new thing? You've just got this incredibly friction full product journey that you don't even control.

Jacob Brown (14:43.321)
Hmm.

Harsha Goli (15:02.466)
before people can even get to your business. You can't do that. That's one of the reasons why we're building what we're building because that doesn't need to be like that. We can make this a lot better. We can make this a lot easier.

Jacob Brown (15:17.207)
Yeah, hmm. Basically it sounds like everything sucks right now. It's hella hard to be a startup founder and be, you know, not have to have in the back your head that I might get a walls notice or some kind of notice in my mail and be totally screwed.

Harsha Goli (15:32.022)
like pumped up fun, right? Like great example, you know, just took off out of nowhere, right? Did really well, you know, like I applaud the team's ability to keep the lights on, but that much attention is just so much. And when you're a small little startup, you don't have the budget for a big old compliance department. You don't have the budget for really well seasoned lawyers. You're probably doing something that hasn't been done before to have that many eyes on that like startup so quickly. It's like, wow.

that company's probably gonna die, you know? it just, like, it sucks, but like...

Jacob Brown (16:03.609)
It's funny because like saying the quiet thing out loud is probably something like the average founder goes a little more risk on when they're small because they assume they're a small fish and will go into the radar and once they hit sufficient size then they'll pay and they'll fix it and you know when it's needed. If you pumped off fun at your screw like it's too big too fast sorry

Harsha Goli (16:28.311)
You're just gross.

Jacob Brown (16:30.467)
But it does seem like a lot of people just like they do what they can they pay their lawyer Hopefully the lawyers competent but at some point they got a kind of yellow or you don't build anything

Harsha Goli (16:41.698)
That's the situation most people are in, in this space, to be honest. And then it sucks because it's so cyclical because then regulators look at something like pumped out fun and they're like, man, the rest of y'all are like this, right? Like I cannot tell you how often on calls with regulators or like lawyers, they're like, well, I'm glad you guys are like Bitcoin first or Bitcoin only, you know, like as long as you guys aren't like FTX. I'm like, gosh dude, you know, like the damage.

Jacob Brown (16:46.147)
So what is?

Mm-hmm.

Jacob Brown (16:52.835)
That's the scapegoat.

Jacob Brown (17:08.216)
Yeah.

Harsha Goli (17:09.09)
that happens when people, because remember, people forget this about FTX. FTX was only operational for a year. They got really big, really fast. It was very, very fast. Same situation.

Jacob Brown (17:17.379)
That's crazy. Yeah.

Jacob Brown (17:23.961)
Yep. Interesting. So then what is, like you're a founder, we don't want to be all doom and gloom. Like we're trying to still push Bicklin forward. So like, it sounds like the two, I guess, like what are the paths? Like you could use someone like Magnolia who can kind of like abstract away some of the complexity. But like, what is the yellow brick road here? Like the potential decision trees if you're a founder trying to be compliant, but not go insane.

Harsha Goli (17:51.374)
So two different answers for two different, basically, personalities that I have. One is the answer that I give for Magnolia, as Magnolia's founder, and the other I'm going to give is a Bitcoiner. So here's a Bitcoiner answer. The Bitcoiner answer is, even though I hate regulation, not all regulation is bad. Because right now, this industry needs protections from these just overzealous bureaucracies with people who are just executing their own agenda that has nothing to do with the elected people.

We need protections against people like that, right? Like the government is way bigger than any single entity. There's, you know, like what, four or 500 different like bureaucracies. Some of them are on the side of good and we need those to police the ones that are not, right? And that's why I'm really, really excited for like any legislation that comes up before 2026, because ideally they will like kind of codify from an elected body what we are allowed to do and what we're not allowed to do.

And that is just the kind of clarity that we need. So I'm really excited for that because this no clarity thing has been terrible. And then in the meantime, and even afterwards, because all these small startups and medium sized startups are not going to be able to comply. Because things like KYC AML are not going away. Things like state by state money transmitter licenses are not going to go away. And that can cost just a lot of capital. None of that's going go away.

companies like Magnolia that provide the licenses and the infrastructure in a way that's still non-custodial, that is what people need to rely on and actually use to propel their business and be able to say with a clear mind, okay, I'm not at risk. Our company is completely compliant. We're above board. We're one of the good ones.

Jacob Brown (19:42.746)
That's good. Um, you mentioned non-custodial, custodial towards the end there. And I remember that was one that came up recently with, was it tornado cash or samurai? One of those ones where like they got, they got caught and it became this big thing of like the FinCEN rules from 2019 were called into question because if you don't control the keys or if you don't really move the money, you're not responsible, but now maybe you are. So like how much of a safe haven is custodial versus non-custodial and like the headache involved?

there.

Harsha Goli (20:14.552)
So that's a great question, by the way. So non-custodial means different things to different people. To Bitcoiners, means it's not your keys, not your coin. No one can take my keys. But to infrastructure providers like myself and even to anyone who does KYC AML, the value of your infrastructure isn't in can I take someone's money. It's can I prevent this money from being moved. That's all KYC AML is about. That's all about preventing money from moving.

to the benefit of terrorists, right? That's OFAC compliance. And so, you can still be a completely non-custodial entity that doesn't have the ability to move someone's funds without their say so, while still being OFAC compliant and preventing payments to political enemies of the US government. Which, by the way, if you're in the US, you cannot do in Islamist. It's not my rules, it's their rules. But you can't send money to terrorists. So that's how...

non-custodial and still not 100 % control, like kind of go hand in hand, right? This is actually, this shows up all over the place in Bitcoin. It's just kind of a nuanced topic that people don't really fully understand, right? Like a lot of non-custodial lightning wallets, for example, have the same problem. They're non-custodial, but they all connect to the same node. The node can't take the money, but if that node charges really high fees, you're going to pay those fees on the way out, you know? And some developers,

Jacob Brown (21:31.513)
Hmm.

Jacob Brown (21:41.144)
Mmm.

Harsha Goli (21:43.662)
what they'll do is they'll define non-custodial as the ability to unilaterally exit. And that is something that we facilitate for sure. You can leave our systems completely by yourself, but then you're not covered by any of compliance stuff that we offer. So it's kind of like at your own risk, which is totally fine for a lot of people. And I respect it. Now, I said we use this word in lot of different ways, and a lot of people use it in different ways. In the financial world, they actually have a word for this that kind of means the same thing, but it's called bankruptcy remoteness.

It's not really noncustodial. What it means is the person who's interacting with like, you know, the bank counter, you know, who's driving this thing, they don't have the ability to take funds in any legal way. This is really important. If your entity goes bankrupt and creditors are trying to claw back as much, like as many, as much cash as they possibly can, right? Someone is in custody of the thing, but if it's bankruptcy or moat, even from the person who's in custody of it, it's isolated from those creditors, right? It's kind of funny. We all use different words for different things in Bitcoin.

and crypto and finance streams out.

Jacob Brown (22:45.498)
That's super interesting. So on the Bank of Sea remoteness one, I can imagine it gives protection for the holder, it's kind of like more legal headache to get access to it. the, trying to think about the person who's like the infrastructure provider or the broker, it give them, are you saying it gives them protection too by that same extension? Because it's, they can't access it, they get the.

Harsha Goli (23:08.61)
Like we can't, we're not legally touching this money. We are driving the APIs, but that money is not ours in any way, or form. And that's really important, because we don't really want to own this money, because that's like a headache for ourselves too. We don't want to be in a position where if someone, like God forbid, we go down, we're just not going to be viable anymore. We don't want our customers' money to potentially be like,

Jacob Brown (23:13.528)
Mm.

Jacob Brown (23:17.997)
Got it.

Harsha Goli (23:36.807)
What's the word, like, reachable for our creditors? That's just not something we want. Or our lenders, rather. And so it's a huge benefit to us,

Jacob Brown (23:42.682)
Got it. Hmm. I'm curious about if you want to lean into custodial, because like huge topic, it's going to evolve over time. Some people believe that, and I'm kind of in this camp, that like as regulations get crazier, it could go either way. It either gets really good and you can just file your stuff and custodial kind of becomes a path.

Or it gets so headache inducing to KYC and whatever that these other tools actually have better UX. Like UX is kind of like the friction point for adoption. So there's two kind of like narratives going and we're seeing how they play out. Assuming custodial gets easy enough and that's kind of like the frictionless easier way for it. How should someone try and lean into that? Like they want to go compliant and they're going to deal with the headache as a founder.

Harsha Goli (24:18.702)
Mm-hmm.

Jacob Brown (24:38.873)
What should they know? They're on day one or a few months into the idea. Give us some of the map so they can not start at zero.

Harsha Goli (24:47.938)
Yeah, so if you're going to do this yourself, honestly, what you should do is identify which states you want to service first. Servicing all of these states is going to be kind of difficult. It's going to be a lot, so don't even try to do that, right? Identify which states you want. Then what you want to do is there's this thing called NMLS. I can't remember what it stands for, but it's like the interface that everyone uses for applications at a state level. Most states are like,

use NMLS. And so that's like where you just track your application progress and stuff like that. That's where you apply for your money money transmitter license. Now, within NMLS, there's something called MMLA. Right? MMLA is basically like a common application that you can send out to like 20 or so states that makes it relatively easy to apply to them. Right? So that's like a really like relatively cheap way to apply all these

Folks, now these are all lawyer fees, of course, right, that I'm talking about. you don't have to have a massive compliance team, but you do have to have a compliance team. A lot of these states require the existence of a dedicated compliance officer. So you gotta have one of those, which you're gonna need anyway. But then the other thing you're gonna have to figure out is there are something called surety bonds. Surety bonds are where the main cost comes from. Basically it's an asset or cash or something else that you put up, like in each of these states. Some states have a very low surety bond cost, like $10,000. Other states have a very high surety bond cost.

a million or two, depending on how much volume you perform. So that's where a lot of this cost is. You're not really paying the state, you're putting it up, but you shouldn't expect to get that money back. You're kind of paying the state, like you're putting it into a bond, it's a whole thing. And yeah, like I said, every state has their own rules. Some states have really wacky formulas to figure out how much their surety bonds cost should be. Other states have like,

you know, what's the word, like just a flat P. But that's fine, right? Listen, you're a starting founder, you don't want to do all the things in the world, right? You do as much as you can. What you should do is find a competent lawyer to look at the specific laws for each of these states and figure out which states you are technically exempt from, right? Then send a no action letter to those states. That'll get you at least a couple of states for free.

Harsha Goli (27:09.934)
And typically the no action letter doesn't go contested. If it does, sorry, you're probably gonna be in that state. You got a license in that state. yeah, so that's like my quick little toolbox, you know, of how to get licensed quick and relatively cheap, you know?

Jacob Brown (27:18.828)
Love it.

That's.

That is some serious, serious game we just dropped. So yeah, definitely sounds like KYC AML, that's part of the course, you need to find a provider for that most likely. MTL.

Harsha Goli (27:28.056)
haha

Harsha Goli (27:32.012)
You've got to. Not only just a provider, you need to find, probably have to go with someone that the bank's like, which might invoke a couple names that you don't like. Try and find someone that they're happy with, that isn't them. We have to have someone, right? We actually use like a Amboss for Lightning, which great people, great friends. They don't do KYC, they just do AML stuff.

Jacob Brown (27:38.713)
Hmm.

Jacob Brown (27:46.531)
And

Jacob Brown (27:49.814)
Mm-hmm. Yeah, and just so I'm clear, is the disconnect there that the corporate bank you're using is going to require you to have those protections or they won't bank you or is that that's the connection?

Harsha Goli (28:05.26)
They won't bank you, the regulators aren't going to grant you a license. You need to have an AML KYC policy drafted up. That policy needs to be third party reviewed. It's called an AML CFT policy, Combating Financial Terrorism, something like that. That's specifically a policy you need. No one will work with you without an AML policy.

Anti-money laundering is taken so seriously in this country. It is wild.

Jacob Brown (28:36.078)
Hmm got it. Okay, we dropped all the acronyms private I wrote them down so they'll be in the description people you can you can you can plug them in later, but this is this is 100 % yeah, this is crazy SpaghettiOs But okay, this is very cool. Let's let's pivot them a little bit into the stuff. We were talking about in Twitter with Bridging assets, what is taxable event and like just to preface a little for people

Harsha Goli (28:42.722)
There are-

Harsha Goli (28:46.659)
The government loves its acronyms.

Jacob Brown (29:05.901)
The thing that kicked it off was Coinbase, which launched CBTC six months ago, five months ago, and it's like skyrocketing in TVL. They're killing it as far as that metric. They're launching products that support it. So the big one today is Morpho, this Bitcoin-backed lending protocol. It looks pretty cool. Lending rates are decent, and it kind of blends TradFi and protocols. So like you log in on Coinbase, you can touch into Morpho. That's all cool. But then the question becomes like,

is bridging into CBTC taxable event. And then it kind of becomes a wash to even take a loan. If you're going to take a haircut was like how it started. And that led to is lightning a taxable event? What is and isn't is like for select. There's a bunch here and you know more than me. So I love you to like kind of guide what makes sense here, but yeah, it's like, give us some color.

Harsha Goli (29:56.506)
The answer is we're not entirely sure right like that's that's the genuine answer that's typically answer when it comes to stuff right so here's why people think it is a taxable events right people think it's a taxable event because the ira like IRS recently put out a Like a you know a new document pretty much saying that they are trying to enforce Like taxation rules at DEX's and they care a lot about this and here's how they're go about it right in like crypto land specifically DEX's there are

a lot of ways that people have come up with to make it really difficult for the IRS to basically figure out who is trading what. And so what the IRS has done is they put together a framework that breaks all of the constraints and expectations we've had. And they're treating anyone who interacts with the transaction, specifically crafts the transaction, to be a broker. Anyway, this is all getting into who is responsible for

like submitting a 1099-DA, which is how the IRS figures out if this thing is taxable or not, right? This all signals like pretty heavily that the IRS is pretty interested in taxing anything that converts from one asset to the other. And the language that they used is like a little bit vague, which is why this applies to way more than just DEXs. It applies to bridges, applies to like, you know, a lot of like things in Bitcoin land as well. It can apply to like Lightning Bridges too. If, if...

If a decentralized thing is doing something from asset A and turns into asset B, IRS probably wants to cut. That's really annoying. Really annoying. Now that specific guideline they put out is getting sued right now. They might drop it in the next administration. We just don't know. We don't know how the lawsuit's gonna go. It's going to take two years until it's actually going to be enforced. So there's a lot of time. That's why people think this thing ought to be taxed.

I'm sorry, that's like a lot of context here. People think that this won't be taxed because this is not a bridge that we're talking about. We're talking about a loan. Even though are, Bitcoin is leaving your custody and a stablecoin is entering your custody, it's a little bit more nuanced than that. This isn't a conversion. You're not selling it. Even though when you look at it,

Harsha Goli (32:15.662)
you know, like you're getting the USD value of Bitcoin in a stable coin, right? It's just the Bitcoin is being collateralized. More things are happening in the background. But when you look at this with dimly lit glasses or whatever the thing is, this looks like a conversion, right? That's why people all still, that's the mindset of why people think that this is going to be a tax, like a tax evade, right? Now, what we're talking about is we're trying to figure out what the letter of law means or says. First off, it's not clear.

Second off, think people in broader crypto and Bitcoin don't understand this. The government is savvy when it comes to this stuff. They have caught up. They are not leaving crypto alone. They've been waging a war at the institutional level for almost four years, or rather two years. It feels like four years. If the letter of the law doesn't say this, these bureaucracies, they can just put out a new guideline that says they're going to tax a specific thing.

And that seems to be the direction that they want to go in. The only thing really changing that is going to be this new administration. And if they have a much softer opinion on crypto as a whole and they want to see crypto fly, that's the only thing that's going to stop them. These are not laws that are hard to pass. They don't pass. They're bureaucracies. These bureaucracies don't interact with each other either. The IRS document, they just threw out

all the things that FinCEN said and the SEC said. So like, I don't think people understand just how little you should care about things that are not going to be in effect just yet, while also understanding that just because it doesn't say one thing today doesn't mean someone's gonna come out, like someone can't come out in six months and just say something totally different. Like that's coming back to the protections, why we need protections, because that's just the way we, that's the world we live in right now.

Jacob Brown (34:07.585)
Yeah, yeah. And to make sure I'm clear on how these words land, when you say guideline versus like a law, these are separate things, right? Like a guideline is like bumpers on a bowling lane. It's not like something super crazy or like definitive, but it's, it will get called into question if you're trying to set precedent at the court case. Like what's the, what's the dance here of guideline versus law?

Harsha Goli (34:31.18)
No, you've got it. You've got it entirely. So there are no laws for crypto. There are no laws. No elected representative has come out on it with anything that says this is what it should look like or shouldn't look like. So what these bureaucracies have been doing is they've been issuing guidelines or basically fancy blog pieces that pretty much say, here's how you should behave. And this is going to be what we're like.

This is going to be the law kind of until we get like actual something from Congress, like an actual bill from Congress. The thing about this system is that those things are really lossy. It's really all about who cares about what? Like this is exclusively a politics game, right? Like 100%. The FinCEN 2019 thing, if you read it, it reads exactly like how a bit go lawyer.

would make this read. Like it's pretty clear that Bicco like just lobbied for that in there, which is like awesome. Great. Like we benefited for a while, you know, but like that's just the way how things are right now. That's the way it's going to be until the get in place. And when those laws get in place, what like, it's not going to be clear, like clear cut protections. We're going to have to see who actually got the protections, you know, is it all of us? It's not going to be all of us. So who paid the most who like, know, grease the right wheels. This is, think everyone understands.

like laws when it comes to like traffic tickets and building codes, things that individuals have to deal with on the daily basis, millions if not billions of times per year, trillions of times. What we're talking about right now is stuff that's never happened, only happens rarely, right, from the regulatory perspective, and has no precedence for. The only way that that kind of regulatory environment gets figured out is by people like...

just lobbying the right people. That's how this works. If you don't like it, I'm with you. I hate it too. But this is how this system has always worked in the US. It's just that everyday people are not really privy to a completely brand new regulatory environment. That's just not something most people interact

Jacob Brown (36:48.43)
Yep, that makes sense. On this topic, like this gray area topic keeps bugging me. And it's like one that popped up on the timeline when we're in some of these chats is like the wrapped ETH versus ETH debate. And so to me, this brought up this question of like the way that companies need to move because you're offering a service and maybe you're VC funding, there's a bunch of reasons you don't want to get debanked. You have to act differently than the individual who might fight the IRS.

Harsha Goli (37:03.182)
Mm-hmm.

Jacob Brown (37:16.361)
and say these 17 things are transfers, not exchange, that thing. So do we have any examples, because it seems like, because we don't find out until it's a lawsuit with Samara, Tonega Cash, or an exchange, do we have any examples of a person fighting the IRS for a wrapped eighth case and winning? Because that's the one that would be curious to me.

Harsha Goli (37:40.788)
No. No. So how the SEC and other regulatory enforcement agencies operate is they make examples out of people. And that's been their modus operandi for a little bit. So they're not going to go after little known people who can't defend themselves because there's a good chance of that case getting tossed, right? Or rather that precedent not being set. What they do is they go after

Jacob Brown (37:42.392)
Hahaha

Harsha Goli (38:10.208)
a well-known entity with really good lawyers and they come at them with the best they got. There's a lesson, I got this lesson from a mentor of mine because we're obviously super deep in the compliance space. I am someone who is willing to fight. I believe deeply in individual rights and stuff and my entire work in Bitcoin reflects that.

But he told me, like, listen, if that day ever comes, you don't hire the best lawyers. Don't even hire the second best lawyers. If it's a name brand law firm, do not hire them. Right? Hire someone who's in middle of the pack, because if you do and you lose, like, the industry isn't completely destroyed, because it wasn't the best law firm, you know, like there's a chance of this president not holding up. You know? And that's just a wild conversation to have to have with someone.

But if you're going down, just make sure you don't take us all down with you.

Jacob Brown (39:11.545)
The brand name speaks, like how could you take down the tether or whatever it is? Damn, that's a ninja move, that's Man, we ran through most of my questions pretty quickly, we covered a lot, so this has been action packed for the 40 minutes. The only two questions that got left, and then we can just open up to anything that you find interesting or that I didn't ask that is relevant.

This is change at all with stable coins or not really? Like I'm assuming it's just the same kind of KYC AML, but like is anything changed with stables?

Harsha Goli (39:47.329)
Now, so KYC, like all the compliance stuff is just the same, right? The thing is the US government is deeply interested in stable coins, right? Like, so I was at a policy summit in Dallas a couple months back and some wild folks were there, like Paul Ryan was there and a bunch of like other senators and stuff. And it seems like overwhelmingly, they're all pro Bitcoin, right? But overwhelmingly, they are deeply interested in stable coins as a way of projecting our national

like economy, international strength, in a way that competes with China in places like Africa and even South America without necessarily depleting the US dollars like reserves in America. This is a way to expand our global outreach without so much direct involvement, right? Because, well, it's not the US government doing this, it's other companies doing this on behalf of US government, right? And all the money kind of stays over here while the stable coins go over there, right?

which is kind of a fascinating take. I didn't really expect stablecoins to get pulled into the national defense conversation, but a lot of people have it like that. That is their viewpoint here. And if you're someone who doesn't want to see blockchain co-opted by a national government or doesn't want to see Bitcoin co-opted by any government, listen, I understand fully. I deeply empathize, but here's the thing about double-sided swords, double-edged swords, you know?

Your weapon is also their weapon. You gotta embrace that.

Jacob Brown (41:13.881)
Yep, Okay. Well, the last question I got is...

You think about this a lot, so like what would you change or what would be your suggestions? Like I can't quite tell if it's like some people are just kind of like fingers crossed, let the regulators do their bullshit and we're gonna respond in kind and be compliant versus like what does sane regulation look like? Like what are some of the suggestions that people putting forward that make sense?

Harsha Goli (41:48.27)
So this will never happen, by the way, right? What I want. This would never happen. But instead of like 50 state licenses to do this stuff, if it could be one federal license, that would make life really easy for everyone, right? Now you could argue that's technically already the case. That federal license is just called a bank charter. And I hear you, but I don't really want to be burdened by 200, 300 years of banking law, you know?

Jacob Brown (41:50.133)
Yeah

Jacob Brown (42:16.333)
Hmm.

Harsha Goli (42:17.26)
That's a ridiculous burden on any business. There needs to be something that works for the mom and pops of crypto, as well as the coin basis of crypto. There needs to be. That would be my one thing. It's not going to happen, not because making law exists or anything like this, but because states have the rights to regulate financial things within their borders. That's why MTLs exist. State banks are also a thing. You just never interact with them.

And oftentimes they're not entirely FDIC compliant or FDIC insured. But they do exist, you know? Yeah, so that would be my wish list item.

Jacob Brown (42:58.628)
Got it, yeah. And going back to Double-Edged Swords, like I could totally see it makes it way easier to build, but then, you know, kind of the narrative of the, make the government as small as efficiently possible, like that's given them a very blunt instrument to be a source of like all the lobbying. You just point at that thing and that's the thing you look at.

Harsha Goli (43:19.182)
100%. It also, instead of being beholden to 50 different regulatory bodies, which sounds bad, but is actually great because most of them are underfunded, you are beholden to one regulatory body that switches every couple years, you know? And that's not fun. Yeah, so very much a double-edged sword.

Jacob Brown (43:27.587)
Hmm. Yep. Yep. Good point, good point. Yeah, yeah, yeah. Got it. Okay, well, man, we covered a shit ton. This has been great. You're super deep in the space. Anything you want to close with or topics you want to touch on that you think the either founder should know or compliance nerds would find interesting.

Harsha Goli (43:42.688)
Yeah.

Harsha Goli (43:53.934)
Oh man, I mean, I've got so much stuff to say. mean, the thing is like at the end of the day, like even though like we've only talked about compliance in this conversation, this is, it's, I'm still trying to like work out this narrative, but I care deeply about like, you know, the Cypherpunk manifesto. I care deeply about people's privacy and I care deeply about making sure that anyone can interact with like, you know, a monetary value source that is not related to any.

political like currency, I care deeply about all of these ethos values. And you see someone like me who's, you know, contributed to Bitcoin in all these ways, getting involved at like the compliance level. And you you wonder why, why am I doing this? And the real answer is in order for people who don't have my values to interact with Bitcoin, they've got to have like conversion points that effectively bring Bitcoin and TradFi or TradFi into Bitcoin. Right now,

All of those conversion points, which we call in the industry on ramps or off ramps, they're just completely rotted through. And as a result, people in TradFi land can't interact with Bitcoin the way they want to. People in Bitcoin can't interact with TradFi the way they want to. And we all suffer. The road is bleak at times, but truthfully, things are getting better. The more we do, the more business we perform, the more people pay attention. That's always been the case. It all started with...

the pizza transaction forever ago. And look where we are now. We've got a huge financial landscape to build on. We just gotta keep doing the same thing. I could not be more bullish on Bitcoin, even though all I do is focus on Bitcoin's problems. But that's why I focus on Bitcoin's problems, because I couldn't be more bullish.

Jacob Brown (45:37.845)
Heck yeah. We're thankful to you for it. Last side note question, because you started as an engineer and it's always funny to me people who start deep in the weeds and they end up being a CEO where you just kind of like vision and directing. And it seems like you went from like code guy to like reading checklists and reading documents and like sending emails guys. So like is that true? And like how has that transition been if that's the case?

Harsha Goli (46:04.622)
Yeah, it is true. actually had to, like, had to, like, get a really good friend of mine to be the co-founder so he could be the CTO so I can not focus on the CTO part, right? It's been a lot because I still deeply enjoy, like, programming and I still, like, contribute. Every now and then, like, some random project will just see a PR from me. It's just like, that's just how I keep the dream alive because I really do care about this. I just have the ability to set aside what I want to do with what I need to do and I do it.

Jacob Brown (46:22.615)
Nice, nice.

Jacob Brown (46:27.353)
Yeah.

Harsha Goli (46:33.442)
You know, so I can get really deep into anything and make it super exciting to me, which is how I turn compliance into a huge fight for our rights. That's what it is in my head.

Jacob Brown (46:44.526)
Yep. And that's what it feels like. It feels like when it's like passion meeting purpose, you're just like an unstoppable force that's just gonna fuck shit up. that's dope. Cool, man. Well, I think that is the pod. Thank you so much for coming around. It's been great.

Harsha Goli (46:52.942)
100%.

Harsha Goli (47:02.094)
It's been a blast, truly. Great questions by the way, awesome preparation. I had a lot of fun.

Jacob Brown (47:08.513)
Awesome. We'll have to do around two in a year, hopefully when some good stuff has come through and see how precious this part is.

Harsha Goli (47:16.933)
I look forward to it. We'll have a lot to talk about in the year. This is about to be a crazy year for Bitcoin. Bye.

Jacob Brown (47:20.514)
Alright, man.