Speaker 1: Hello, and welcome to the Votes and Verdicts podcast, hosted
Speaker 1: by the litigation and policy team at Bloomberg Intelligence. Bloomberg
Speaker 1: Intelligence is the investment research platform on the Bloomberg Terminal,
Speaker 1: with five hundred analysts and strategists working across the globe
Speaker 1: and focused on all major markets. Our coverage includes over
Speaker 1: two thousand equities and credits, and we have outlooks on
Speaker 1: more than ninety industries and one hundred market indices, currencies
Speaker 1: and commodities. This podcast series examines the intersection of business
Speaker 1: policy and law. I'm Elliott Stein, an analysts with Bloomberg
Speaker 1: Intelligence covering financials litigation, and.
Speaker 2: My name is Nathan Dean, and I'm an analyst with
Speaker 2: Bloomberg Intelligence covering financials policy.
Speaker 1: So today is a very special episode because we are
Speaker 1: recording this almost exactly twelve months since we did our
Speaker 1: last episode with our very esteemed guest, Dan Gallagher, Chief
Speaker 1: Legal Compliance and Corporate Affairs Officer of Robinhood Markets. Dan,
Speaker 1: Welcome back to the Votes and Verdicts podcast.
Speaker 3: Hey guys, thanks for having me. I'm really excited to
Speaker 3: be back. We had a lot of fun last time.
Speaker 1: Yeah, agreed, and we're looking forward to doing this episode
Speaker 1: as well.
Speaker 3: So for our.
Speaker 1: Listeners, I definitely recommend that you go back and listen
Speaker 1: to our last episode with Dan from twenty twenty four.
Speaker 1: But and in that episode we went over his credentials extensively.
Speaker 1: But given Dan's impressive background, I think it's just worth
Speaker 1: highlighting a few of those credentials again. Prior to joining
Speaker 1: Robin Hood, Dan was partner and deputy chair of the
Speaker 1: securities department at the law firm Wilmer Hale. He also
Speaker 1: served as a Commissioner of the US Securities and Exchange
Speaker 1: Commission the SEC from twenty eleven to twenty fifteen, and
Speaker 1: he held several other positions at the SEC on the
Speaker 1: SEC staff prior to being an appointed commissioner. Dan's previous experience
Speaker 1: also includes serving as the chief legal officer at Mylin,
Speaker 1: a leading global pharmaceutical company, and as a president of
Speaker 1: a financial services consulting firm.
Speaker 3: All right, Dan, let's bring you in.
Speaker 1: Normally, we always ask our guests with the first question
Speaker 1: to tell us about their work history. But since we
Speaker 1: did that last time, and since I sort of just
Speaker 1: went over that in brief, why don't we sort of
Speaker 1: focus on the last twelve months since you were last on. Obviously,
Speaker 1: we're we were just passed the six month mark of
Speaker 1: the second Trump administration. So maybe to start off, you
Speaker 1: can give us an update on recent developments at robin
Speaker 1: Hood over the past year, and you know, maybe more specifically,
Speaker 1: how what has changed for the company, what's better, what's
Speaker 1: worse over the last six months under the Trump administration.
Speaker 3: Look, I couldn't be more excited to come and give
Speaker 3: you guys the update because a year ago, when when
Speaker 3: we were talking about the regulatory policy issues that we
Speaker 3: were dealing with at Robinhood, it was a pretty bleak, right.
Speaker 3: We had I think, as I told you at the time,
Speaker 3: five federal rules, all all aimed at our business model
Speaker 3: like scud missiles ready to blow us up. We had
Speaker 3: SEC enforcement all over us in fin reinforcement. I mean,
Speaker 3: it just was a very hostile environment in which to
Speaker 3: you know, provide financial services generally, but to be in
Speaker 3: at based brokerage and to be robin Hood. Quite frankly,
Speaker 3: there was you know, I think there was an actual
Speaker 3: prejudice against Robinhood by the prior administration and the agencies
Speaker 3: implementing their policies. And you know, I don't think it
Speaker 3: was appropriate, but I think there was one, and like
Speaker 3: Presto Changoh, since November, things could not be any more different.
Speaker 3: You know. We we have a very very knowledgeable and
Speaker 3: business friendly SEC chairman and Paul Atkins a good friend
Speaker 3: of mine, my my former boss. Uh, that's certainly one
Speaker 3: of my mentors.
Speaker 1: You know.
Speaker 3: I worked for him when he was a commissioner. I
Speaker 3: worked for him at Potoma Global Partners. And he understands
Speaker 3: the issues facing brokerage firms and other players in the
Speaker 3: in the capital markets. He's been living them for decades
Speaker 3: and and you know, very knowledgeable, but also you know,
Speaker 3: a free market guy and and not somebody who thinks
Speaker 3: that regulation is always the answer to any problem. So
Speaker 3: I you know, it's a an absolute sea change in
Speaker 3: the regulatory environment. I joke with my team here at
Speaker 3: robin Hood. You know, I have the I have the
Speaker 3: government affairs team, I have external affairs. I'm legal, you know,
Speaker 3: I've got corporate compliance and I you know, I said
Speaker 3: to these teams coming into January, guys, girls like we
Speaker 3: need to start thinking offensively. We need to start going
Speaker 3: front foot. You know, we got very very good at
Speaker 3: the defense at the back foot and that's great, and
Speaker 3: you know we're still alive. We weathered this storm largely intact,
Speaker 3: which is amazing. But now we have to start thinking,
Speaker 3: here's an environment in which we can actually help Robinhood
Speaker 3: progress and help Robinhood customers. What are the types of
Speaker 3: things we need to be doing to put some WS
Speaker 3: on the board, not just to defend, but to put
Speaker 3: some WS on the board. And it's just been really
Speaker 3: fun to use your brain in a different way.
Speaker 1: And what are some of the areas where you could
Speaker 1: see robin Hood sort of going on the offensive?
Speaker 3: Like you mentioned, there's a couple buckets see for me.
Speaker 3: One obviously is crypto. As you guys know and I
Speaker 3: think we talked about last year, we ran a very
Speaker 3: conservative crypto platform during the Biden administration. We didn't list
Speaker 3: four hundred coins, we didn't do staking, we didn't do lending,
Speaker 3: we didn't do all these things that our competitors in
Speaker 3: the crypto space were doing, all with a mind towards
Speaker 3: being respectful of what the then leadership at the SEC
Speaker 3: was saying, the rules are you know, and Gary was
Speaker 3: basically saying everything's a security and come in register. We
Speaker 3: disagreed on the everything as a security, but we did
Speaker 3: try to come in and register. We didn't do anything flagrantly,
Speaker 3: you know, in violation of the securities laws. We actually
Speaker 3: pretended like we were regulated. We operated our crypto entity
Speaker 3: like it was a broker. You know, we did tax reporting,
Speaker 3: we did fee disclosure to customers. We tried to create
Speaker 3: best execution in a world in which you know there's
Speaker 3: no MBBO. I mean, very hard thing to do, and
Speaker 3: we think that was all good for the customers. Could
Speaker 3: we have made more money, yeah, if we had listed
Speaker 3: more coins and done other allowed other features that the
Speaker 3: competitors were doing. We didn't, and you know, looking back
Speaker 3: on it, I think it was the right tact. And
Speaker 3: you know, we came out, we got a way l letter,
Speaker 3: we never got sued by the SEC. And now of
Speaker 3: course you have you know, Congress working on on crypto,
Speaker 3: and so we're working with Congress, we're working with the SEC.
Speaker 3: You know, we've been able to expand the platform with
Speaker 3: some clarity coming from the SEC on things like meaning
Speaker 3: coins and staking. But there's more to do. So so
Speaker 3: crypto is a big one for us. I would say,
Speaker 3: you know, market structure. If you remember right after Game Stop,
Speaker 3: this whole notion that payment for order flow is somehow
Speaker 3: bad and must be. I mean basically the last SEC
Speaker 3: was going to kill it with some of the rule
Speaker 3: proposals they came out with, you know, recognizing that it's
Speaker 3: not bad and it's you know, to the extent that
Speaker 3: people think it's a conflict or the other issues with it.
Speaker 3: What can we do, you know, proactively to alleviate any
Speaker 3: of those concerns. What kind of disclosure or other things
Speaker 3: can we do with payment for order flow? You know,
Speaker 3: can we work on And so those were thinking about that,
Speaker 3: and then you know, we're a public company two, uh,
Speaker 3: a big one at this point. You know, the companies
Speaker 3: really had a nice run and and you know we
Speaker 3: we have issues like other US public companies. It's hard
Speaker 3: to be a public company here. And you know Chairman
Speaker 3: Atkins has been talking about alleviating some of the burdens
Speaker 3: of being public, trying to get the IPO market started,
Speaker 3: things like that. All of that is good for us,
Speaker 3: right if we can you know, streamline some disclosure requirements
Speaker 3: and uh, you know, get more clarity on you know,
Speaker 3: accounting rules and other things. Obviously, we are and will
Speaker 3: remain a public company. It's good for us if there's
Speaker 3: more I pos right, we're not right now, we're not
Speaker 3: an EC firm, so we're not you know, taking private
Speaker 3: interests in private companies at this point.
Speaker 1: Uh.
Speaker 3: You know, for us, it's good if there's more stocks
Speaker 3: trading on the platform, and so we're very interested in
Speaker 3: that whole work stream on, you know, streamlining the idea
Speaker 3: of being a public company.
Speaker 2: You know, I'd love to come back and talk about crypto,
Speaker 2: and I think we will in a minute, But first
Speaker 2: I want to talk about tokenization because you know, we've seen,
Speaker 2: like you just mentioned, we've seen a tremendous difference between
Speaker 2: the Gary Gensler come in and registered mantra to what
Speaker 2: we're seeing under the chair, you know, you know, Chair
Speaker 2: Paul Ekins, And there was a lot of discussion of tokenization,
Speaker 2: and you know, when I was reading about the SEC's
Speaker 2: Crypto Task Force and Commissioner Purs's statement and tokenization, I
Speaker 2: just thought, this is something that I think is probably
Speaker 2: gonna be one of the biggest issues of twenty twenty
Speaker 2: five released for the second half. So can we first
Speaker 2: start off, can you explain to our listeners how tokenization
Speaker 2: of securities works and how is Robinhood thinking about tokenization?
Speaker 3: So, you know, unfortunately right now you don't see a
Speaker 3: lot of activity in the US as far as tokenizing
Speaker 3: stock trading. We certainly don't have it for public companies
Speaker 3: what we call the NMS equities, right, the NASDAC New
Speaker 3: York List in stocks. I know there's some limited amount
Speaker 3: of private company based blockchain trading going on, but it's
Speaker 3: still very nationent tokenization to me, it takes two flavors, right.
Speaker 3: It's sort of the current state, which is the idea
Speaker 3: that you could trade a token that's basically a mirror
Speaker 3: reflection of the underlying equity, right, that gives you the right,
Speaker 3: you know, the economic interests in that underlying equity. But
Speaker 3: it's a separate instrument, you know, kind of a derivative
Speaker 3: kind of not because it's really got the same features.
Speaker 3: But it trades on a blockchain, not in the traditional
Speaker 3: equity market structure, right, not on an exchange with DTC
Speaker 3: clearing it and brokers as intermediaries. That you know, there's
Speaker 3: a lot of discussion about that, and you know, the
Speaker 3: token versus the security, what rights do you have and
Speaker 3: other things like that. You know, under the UCC there's
Speaker 3: there's all sorts of debate. That's where a lot of
Speaker 3: talk has happened. Now. I think the end state canon
Speaker 3: should be where the token is the security, and that
Speaker 3: where companies are issuing securities, whether they be bonds or equities,
Speaker 3: into the blockchain, and that there's a recognition under state law.
Speaker 3: By the way, fun fact because I know you got
Speaker 3: a lot of lawyers listening, right the Delaware code. Fun
Speaker 3: fact that the Delaware Corporate Code was amended in twenty
Speaker 3: seventeen to allow recognition of tokens basically as equity interests
Speaker 3: in Delaware corporations. Not a lot of use for it yet,
Speaker 3: because you can do an issuance right it. It assumes
Speaker 3: that a company's going to do an issuance into the blockchain,
Speaker 3: but the secondary market trading side of it hasn't yet
Speaker 3: been figured out. And that's the real debate that Nathan's
Speaker 3: teed up here. So you can imagine a world though
Speaker 3: where you know, Texas, I don't know if they've on
Speaker 3: it yet, but they'll certainly if they haven't, they'll do
Speaker 3: it soon. Right where all the states are recognizing a
Speaker 3: different form and it's kind of like amending your the UCC,
Speaker 3: right you're just saying, yeah, that that's token. Is your interests?
Speaker 3: Is your security interest in that in that company, that's
Speaker 3: your equity position. We're not there yet. I do think
Speaker 3: that's where we should get to. So in the in
Speaker 3: the current atmosphere, we're talking about, okay, tokens that represent
Speaker 3: interests in underlying securities we haven't seen because of the
Speaker 3: existing rules. A lot of innovation in the space. Another
Speaker 3: fun fact I know you guys, I'll give you another
Speaker 3: one of rapid fire fund facts. Uh, there's a company
Speaker 3: called Paxos out there. I don't know if you've seen Paxos,
Speaker 3: great innovative company, amazing CEO Chad is terrific. They came
Speaker 3: in when Jay Clayton was SEC chairman and actually got
Speaker 3: a no action letter that allowed them on a very
Speaker 3: limited pilot basis to trade NMS equities in a blockchain. Now,
Speaker 3: it was very complicated because they had to kind of
Speaker 3: reverse the you know, or mirror image the trade into
Speaker 3: the DTC at the end of the day, and there
Speaker 3: was just a I think ten or so equities and
Speaker 3: but it was kind of cool. And if you read
Speaker 3: that no action letter, which is up on the SEC website,
Speaker 3: Paxos did this amazing job of laying out all the
Speaker 3: issues they faced and trying to provide that functionality and
Speaker 3: then requesting the relief which they got. And you know,
Speaker 3: when you read that list of issues to me, that
Speaker 3: just lays out the current impediments to blockchain based tokenized
Speaker 3: trading of equities today. You have to there's a requirement
Speaker 3: that DTC clear these equities. You've got transfer agent issues,
Speaker 3: you've got registration issues. Right. If you have a blockchain
Speaker 3: that's just continually processing transactions, there's there's folks acting in
Speaker 3: some capacity, right, or you know there's AI acting in
Speaker 3: some capacity in the blockchain. Are they acting like a broker?
Speaker 3: Are they acting like a transfer region? Are they acting
Speaker 3: like an exchange? Are they acting like a clearing agency?
Speaker 3: And if so, do they have to be registered with
Speaker 3: the SEC? Current law would tell you yes, but it
Speaker 3: would also tell you why this is silly, right, Like
Speaker 3: some of these registration categories become either redundant or just
Speaker 3: sort of superfluous in a blockchain based environment, and so
Speaker 3: that type of relief is going to be needed from
Speaker 3: the SEC. Right, we need relief from this requirement to
Speaker 3: go clear and settle at DTC or at least some
Speaker 3: relief where DTC is a node in the blockchain and
Speaker 3: you know, validating transactions, something where you know, the government
Speaker 3: gets comfortable that the protections that come with that registration
Speaker 3: category are still being provided in the blockchain, and we're
Speaker 3: not there yet. You know.
Speaker 2: I'm just amazed at the fact that somebody in Delaware
Speaker 2: in twenty seventeen had to force Sight to put that
Speaker 2: into the code. And if that person ever listens, I
Speaker 2: hope they decided to buy bitcoin, because it just amazes
Speaker 2: me that just that many years ago they were able.
Speaker 3: To do that. And full props on that one. You know.
Speaker 3: A sub fun fact to the maiden fun fact is
Speaker 3: that Jack Markell was the governor of Delaware at the
Speaker 3: time and just an amazingly great guy. Actually sat on
Speaker 3: a board with him of a company, a blockchain company.
Speaker 3: He later became the ambassador to I don't know if
Speaker 3: it's to the a Vatican or to Italy. I think
Speaker 3: it might have been to Italy under Biden, but he
Speaker 3: was Italy, it was Italy. Yeah, I mean, just an
Speaker 3: amazing guy, great guy, you know, just a fun person,
Speaker 3: generally super smart, but had that foresight because were almost
Speaker 3: ten years later and that provision sitting there. So I just.
Speaker 1: Got technically it was Italy and San Marino. Oh we
Speaker 1: should have him on the podcast.
Speaker 3: I love that. Yeah, you should get Dak Markel. He'd
Speaker 3: be a fun one.
Speaker 2: So just one follow up on the tokenization. You you
Speaker 2: listed out a lot of things like disclosures and compliance
Speaker 2: and you know, things that he certainly excites Elliott and I,
Speaker 2: but you know, for certain other you know folks out there,
Speaker 2: you know, it may be more of a political handcuff
Speaker 2: or more of a detriment towards innovation.
Speaker 4: Do you think as the SEC embarks.
Speaker 2: With this tokenization work that their views, maybe it's a
Speaker 2: conditioner or person's view, that tokenization securities are still securities
Speaker 2: and so forth like that. Are they going to stave
Speaker 2: off any of the perceived benefits or do you think
Speaker 2: that the compliance and disclosure aspects will actually just be
Speaker 2: able to foster innovation.
Speaker 3: I think the latter, I mean, and it's funny. I
Speaker 3: talked to Commissioner Purse after she put her statement out
Speaker 3: and I said, I agree with everything you said. I mean,
Speaker 3: this should be fully regulated, right and and it should
Speaker 3: be you know, Blessed by the SEC. There was this
Speaker 3: meme out there that you know, the crypto industry was
Speaker 3: coming in and asking the SEC, you know, basically, let
Speaker 3: us hokenize stock trading and don't apply any of the
Speaker 3: rules to us. Now, if any of them were dumb
Speaker 3: enough to actually ask for that, they warranted her notice
Speaker 3: about tokens and they shouldn't be in DC. If you
Speaker 3: ask me, we would never do that because we're realists.
Speaker 3: And also, you know, as I mentioned that a lot
Speaker 3: of protections for customers come with these impediments to tokenization,
Speaker 3: right the registration categories and the requirement to clear and
Speaker 3: settle to etc. Is born of really good rationale. It's
Speaker 3: that you want to know that where your securities are.
Speaker 3: You want, you know, not to have to trust some
Speaker 3: blockchain or some cold wallet or something else that you
Speaker 3: can't verify. But how do we replicate that or how
Speaker 3: do we give some comfort to the government and therefore
Speaker 3: to customers. But you know, what we come up with
Speaker 3: on a blockchain is just as good, or quite frankly,
Speaker 3: it's going to be even better. That's the challenge. And
Speaker 3: I think we can get there, I really do, and
Speaker 3: I think we have to get there quickly. I mean,
Speaker 3: you know, I'm acting like we have three and a
Speaker 3: half years here because we've been living you know, every
Speaker 3: four years, we have a different economy and a different
Speaker 3: I mean, it's just crazy. So I have to assume
Speaker 3: the worst, you know, that we'll get a highly you know,
Speaker 3: a repeat of the Biden administration here in twenty eight.
Speaker 3: So let's get something together. Let's do it quickly, let's
Speaker 3: lock it in. While we have Paul Atkins, you know,
Speaker 3: who's a really you know, I would say, a visionary
Speaker 3: when it comes to some of this stuff. While we
Speaker 3: have hester still around, and while we have you know, folks,
Speaker 3: whether it be at Finner A, DTC elsewhere, who are
Speaker 3: really interested quite frankly and being part of this. I
Speaker 3: actually give DTC a lot of credit.
Speaker 1: Yeah, just one last question on the tokenization. Do you
Speaker 1: see any differences between you know, trying to put some
Speaker 1: sort of tory framework around tokenization of publicly issued securities
Speaker 1: versus private markets.
Speaker 3: Yeah, they're actually pretty big differences. I think. I think
Speaker 3: eventually the public companies will just come along because it's
Speaker 3: kind of like, what's the difference you know, if I
Speaker 3: if I'm my stock is trading on ancient infrastructure now,
Speaker 3: and it's clunky and there's a two day settlement cycle.
Speaker 3: What do I a is the issue or care if
Speaker 3: it's in a more efficient blockchain, real time settlement, you
Speaker 3: know all the other benefits that come with that. So
Speaker 3: I actually think for them it's just sort of a
Speaker 3: commoditized experience and they'll they'll be fine with it. On
Speaker 3: the private side, you have, I think each each company's
Speaker 3: idiosyncratic and in their view of this, right do they
Speaker 3: want the transparency, the liquidity, everything that comes with having
Speaker 3: your equities, you know, being traded on a blockchain. Some do,
Speaker 3: some don't, you know, you could you know, we had
Speaker 3: recently we announced in the EU we had some tokens
Speaker 3: on SpaceX and open ai and you know, you know
Speaker 3: open Ai I would say, uh, you know, issued a
Speaker 3: public statement saying, you know, we had no part of
Speaker 3: this or whatever, and and you know I respect that,
Speaker 3: And I think, you know, for them, it's less exciting
Speaker 3: than it might be for SpaceX or some other even
Speaker 3: smaller company to have a market, you know, a more
Speaker 3: accessible market in their equity. So we'll see. I do
Speaker 3: think I I think it will become a very good
Speaker 3: thing eventually for private companies you know right now just
Speaker 3: even even uh you know, keeping track of your holders
Speaker 3: and vesting events and all these other things. I mean,
Speaker 3: you have great services out there like Karta and others,
Speaker 3: you know, but I think and you know, even the
Speaker 3: blockchain can do the same and more. And I know
Speaker 3: even the Kartas of the world are getting involved in
Speaker 3: blockchain initiatives and things like that. So yeah, I think
Speaker 3: this is all for the good, guys, and I think
Speaker 3: it's all for the good for customers and what we
Speaker 3: what we're coming up against though, and what you know,
Speaker 3: we have to deal with their vested interests. Right. You
Speaker 3: have you know, major institutions in the US that that
Speaker 3: you know can't innovate quickly, that runs you know, these
Speaker 3: mainframes in buildings and you know, that operate on antiquated
Speaker 3: infrastructure that the current market structure works for them. And
Speaker 3: they're powerful and you know they they're on the boards
Speaker 3: of the important institutions. They're in Washington with with big
Speaker 3: lobbying forces. So we're gonna have to kind of overcome that.
Speaker 3: And I think the advancement of crypto and the legitimization
Speaker 3: of crypto, which I know you guys want to talk
Speaker 3: about too in Congress is going to help us on
Speaker 3: the crypto related which is really just the blockchain innovation
Speaker 3: that we're going to have on the equities and fixed
Speaker 3: income side.
Speaker 1: And we're going to talkbout crypto a little more, but
Speaker 1: before we get there, we'll leave the audience in suspense
Speaker 1: on that. Let's talk AI a little because yesterday, which
Speaker 1: was July twenty third, the President rolled out his AI
Speaker 1: Action Plan, which you know, to summarize, basically encourages eliminating
Speaker 1: regulations and barriers that unduly burden innovation in artificial intelligence.
Speaker 1: And I know in March, SEC Commissioner Mark Uyada said
Speaker 1: something similar that financial regulators should take a technology neutral
Speaker 1: approach to AI, and that he was concerned about the
Speaker 1: SEC potentially placing unnecessary barriers on artificial intelligence. I wanted
Speaker 1: to get your perspective, you know, from your seat, what
Speaker 1: do you see, as you know, barriers affecting robin Hood
Speaker 1: and your competitors and peers in the financial regulatory space,
Speaker 1: and you know, how do they affect Robinhood, how does
Speaker 1: it affect robin Hood's customer base, and what are the
Speaker 1: policy responses that you'd like to see coming from Washington
Speaker 1: to foster AI.
Speaker 3: Yeah, great question, and you know, sort of the macro
Speaker 3: answer is that the barrier for us at robin Hood
Speaker 3: with our primary regulators right with with the SEC, with FINRA,
Speaker 3: I guess CFTC also now since I last talked to
Speaker 3: you guys, we registered in FCM with the CFTC and
Speaker 3: the States and our and now our international operations. All
Speaker 3: the rules and laws are written with human beings in mind,
Speaker 3: right and now some you could read to allow for
Speaker 3: technology or not. Some might actually speak to human actions
Speaker 3: and regulating human actions. But you know, and we've encountered this,
Speaker 3: I mean, I would say most specifically with FINRA over
Speaker 3: the years, where the rules just have not kept pace
Speaker 3: with the advancement of technology. And I give Robert Cook
Speaker 3: over at Fenneral a lot of credit. He's on the
Speaker 3: you know, this modernization kick where they're going to modernize
Speaker 3: the rules. I wish they had done that before they
Speaker 3: brought enforcement actions against me for you know, not not
Speaker 3: fitting their rules because the rules are from nineteen fifty.
Speaker 3: But you know, so really it's this sort of macro
Speaker 3: issue of how do we make sure if we're going
Speaker 3: to do things with AI that we used to use
Speaker 3: humans for How do we make sure the regulators get comfortable,
Speaker 3: you know, without amending their rules necessarily to say specifically
Speaker 3: that AI can do it? But how do we get
Speaker 3: them comfortable that AI can do what humans did yesterday?
Speaker 3: They can AI can do it today? And what are
Speaker 3: the controls around that? So you know, if I was
Speaker 3: running the SEC, if I was running you know, finner
Speaker 3: A CFTC, I think I would just start from like
Speaker 3: this main thesis that we don't have to go amend
Speaker 3: every rule to say AI because once you do that,
Speaker 3: then you know the next thing comes along. Right, But
Speaker 3: you have to recognize that AI can do everything that
Speaker 3: humans can do, probably do it better. But what we
Speaker 3: want to see as a regulator is that your AI
Speaker 3: does what you think it does right, that that you
Speaker 3: understand the code, you understand how it operates, and that
Speaker 3: the outputs are consistent with what you say the output
Speaker 3: should be. Right. So, if I'm a brokerage firm, make
Speaker 3: me have policies and procedures on AI, you know, make
Speaker 3: me write my code description in plain English so that
Speaker 3: examiners can come in and understand what it does. Let
Speaker 3: them test outputs to see if it's actually working right,
Speaker 3: But otherwise let it, let it work like a human,
Speaker 3: have supervision of it, right, make sure that there's somebody
Speaker 3: that's going to ensure it's operating in that way that
Speaker 3: tests it. You know, have internal lot of testing whatever
Speaker 3: you want to do by way of controls. But that's it.
Speaker 3: Don't don't try to get in there and regulate AI. Right.
Speaker 3: And a great example it's just use the investment advisory
Speaker 3: business right where you're you have a fiduciary reallylationship with
Speaker 3: your customer. You guys have seen the rise of robo
Speaker 3: advisors over the last twenty years, right, type of AI, right,
Speaker 3: I mean, you know, not not very sophisticated in the
Speaker 3: early stages. But what can that AI do that or
Speaker 3: a human do that the AI can't when it comes
Speaker 3: to recommending stocks and bonds and other you know, trading strategies.
Speaker 3: The answer pretty soon is, you know, as AI develops,
Speaker 3: it's gonna be nothing, right, I mean, the AI theoretically
Speaker 3: should be better. It's going to take out the emotion
Speaker 3: of it and just get to the bottom line. You know,
Speaker 3: this is the best recommendation for you, like this trading strategy,
Speaker 3: and so you know, why do you have to write
Speaker 3: a whole rule set about that. The rule set today
Speaker 3: anticipates that Nathan's on the phone, you know, telling you
Speaker 3: Elliott what to do. Who cares if ahis doing it right?
Speaker 3: And I think if we get into this mindset of,
Speaker 3: oh my god, we have to go in and have
Speaker 3: the rule for AI for advisory, it'll never happen. It'll
Speaker 3: take three years, right, and it'll be like, oh gosh,
Speaker 3: now I'm going to start trying to write a rule
Speaker 3: that tells you how to code, or that tells you
Speaker 3: what databases the AI can look at, or you know,
Speaker 3: whatever it is, and we're just going to go off,
Speaker 3: you know, off track. Instead, I think they should just
Speaker 3: do a very principles based AI can do what humans do.
Speaker 3: We get it, have supervision, have policies and procedures, let
Speaker 3: you innovate, and let's see how it goes.
Speaker 1: So and well, I was going to say, I know,
Speaker 1: Robin Hood in its policy position website says that you know,
Speaker 1: it envisions a regulatory environment that foster's collaboration between the
Speaker 1: industry and regulators. Are you seeing advancement in that area,
Speaker 1: especially in the last six months.
Speaker 3: I mean, again, it's sort of night and day in
Speaker 3: the last six months. I think you heard it from
Speaker 3: you know SEC leadership in the last administration. You heard
Speaker 3: it from the White House like this fear of AI.
Speaker 3: We need to control it, we need to rein it in.
Speaker 3: We need And it wasn't sort of a focus on
Speaker 3: the positives, right And you saw this report yesterday, the
Speaker 3: executive order from this administration. It's all largely focused on
Speaker 3: the positives and and you know, eliminating barriers to using
Speaker 3: AI and so yes, it's a much more collaborative environment.
Speaker 3: I mean, I've had great conversations directly with the senior
Speaker 3: folks at FINRA about you know, our intent to to
Speaker 3: really start rolling out a lot more AI use cases.
Speaker 3: We've got some great stuff going. We have AI c
Speaker 3: X agents, you know, doing customer service. We rolled out
Speaker 3: AI based we call it core Tex. It's a digest
Speaker 3: that can you know, give give our customers more information
Speaker 3: about particular stocks, you know, and what's happening with them
Speaker 3: and what's moving you know, prices, things like that. I
Speaker 3: I want to get to a world in which you know,
Speaker 3: in the broker not just for advisory, but you know
Speaker 3: in the broker that we're actually making recommendations to customers
Speaker 3: using AI. The advisor that we rolled out is not
Speaker 3: an AI based advisor. We actually have a you know,
Speaker 3: a very experienced person, Steph Guild running that who was
Speaker 3: on Wall Street, was at JP Morgan for I think
Speaker 3: a couple decades and you know, expert in wealth management.
Speaker 3: And that's sort of the value add touched there. But
Speaker 3: I do I do think more and more we're going
Speaker 3: to see a move to AI on the advisory site.
Speaker 2: So the time has come for what we've all been
Speaker 2: waiting for. Let's go back to crypto. You know.
Speaker 4: So we actually saw significant progress in Washington when Congress
Speaker 4: passed the Genius Act, the Stable Coin Bill, and the
Speaker 4: House passed the Clarity Act, also known as what we've
Speaker 4: been calling the.
Speaker 2: Crypto Market Structure Bill. And you know, I'd like to say, like,
Speaker 2: so you've got the Genius Act, You've got this Clarity Act,
Speaker 2: which defines you know, what cryptocurrencies should fall in more
Speaker 2: of the securities bucket versus what falls in the commodities bucket.
Speaker 2: Gives the CFTC authority over the spot markets. But you
Speaker 2: also have the sec under chair Atkins doing some work.
Speaker 2: You'll most likely have the CFTC under future chair Brian
Speaker 2: Quinten's doing some work just because I'm going to go
Speaker 2: out and Limbs say that Senate's going to confirm him.
Speaker 2: You know, how does Robin Hoods think about all these
Speaker 2: pieces of the puzzle and if you had your druthers,
Speaker 2: what would the best endgame scenario look like for you
Speaker 2: in the company.
Speaker 3: Yes, so, look, I'm a genius act. We were super excited.
Speaker 3: Blad and Johan Crabat are head of Crypto. We're at
Speaker 3: the White House for the signing ceremony that they sat
Speaker 3: Blad between Chairman Atkins and Commissioner Purse. I told him,
Speaker 3: be careful what you say you're sitting with the sec.
Speaker 3: But it was a great moment I think for crypto
Speaker 3: and and for the country, you know, to legitimize stable
Speaker 3: coins and to really take a big step forward. I
Speaker 3: think for cryptover at large. So and look stable coins,
Speaker 3: you know it got a lot of bipartisan support. I
Speaker 3: think it's gonna be like tokenization, and actually it'll be
Speaker 3: intrinsically eyed to tokenization. Once you're in the blockchain, right
Speaker 3: and you're using a stable coin to pay for your
Speaker 3: Tesla stock, and it settles instantaneously and you know, your
Speaker 3: your us DC is traded for your you know, TESLA
Speaker 3: token immediately and it's in your account and you see it.
Speaker 3: I mean, this is this is the future, right, But
Speaker 3: we needed to legitimize stable coins first, because again, the
Speaker 3: last administration is super hostile, you know, saying that stable
Speaker 3: coins are security, stable coins are mutual funds. You know,
Speaker 3: a lot of debate about their status too, which you know,
Speaker 3: seemed a little silly to me, but but that's just
Speaker 3: what it was. Uh. Clarity is is really where the
Speaker 3: gain is, right, Clarity. You know, creating the market structure
Speaker 3: for crypto is a huge moment and I don't think
Speaker 3: we've seen anything like this guy since Dodd Frank and
Speaker 3: derivatives quite frankly. Where Congress has decided we're going to
Speaker 3: think about a market that exists, a multi trillion dollar market, right,
Speaker 3: which we had with derivatives, which we do have with crypto,
Speaker 3: and we're going to create the market structure for it.
Speaker 3: We're going to allocate responsibility. We're going to be prescriptive
Speaker 3: here and maybe principle there. And you know, I think
Speaker 3: it's they've made great progress with it. I think there's
Speaker 3: you know, going to be some peaks and changes obviously
Speaker 3: to it before it ever gets you know, to the
Speaker 3: President's desk for Robinhood. You know, we can pretty much
Speaker 3: operate in any environment, I would say. So we're feeling,
Speaker 3: from a business model perspective, pretty hedged with respect to
Speaker 3: wherever they come out on Clarity. We've got our you know,
Speaker 3: CFTC registered, NFA registered at FCM. We've got our broker dealer,
Speaker 3: which is obviously you know, the biggest chunk of our
Speaker 3: business and and historical business line at robin Hood. We've
Speaker 3: got our crypto unit, which is heretofore unregistered but can
Speaker 3: be if need be. It's and it's just kind of
Speaker 3: fun when we sit back and look at you know, okay, well,
Speaker 3: if it's SEC regulated, you know, for whatever purpose the
Speaker 3: you know, the Clarity Act. Obviously there's a strong deference
Speaker 3: to c FTC, but there's obviously a pathway for SEC registration.
Speaker 3: What can we do there, What can we do on
Speaker 3: the CFTC side, What do we do with our regulated identities?
Speaker 3: I mean, one thing though, is for sure, and this
Speaker 3: is where I think, you know, a bunch of folks
Speaker 3: in the crypto community are waking up to what regulation
Speaker 3: actually means. You know that that even the lightest touch
Speaker 3: regulation where you you you're registered as X y Z
Speaker 3: entity uh with whatever agency, but you all of a
Speaker 3: sudden have reporting obligations, you have books and records requirements,
Speaker 3: you get examined, maybe you have some appital requirements. Whatever
Speaker 3: comes with it is a hell of a lot more
Speaker 3: than existed today right when you have nothing. Right, So,
Speaker 3: the the idea of give me regulation, you know, which
Speaker 3: you've heard as a mantra from the community versus the
Speaker 3: reality of man, this is actually pretty tough, and there's
Speaker 3: a lot of programming that needs to be done, a
Speaker 3: lot of tech spend, and you know, hiring you know,
Speaker 3: experienced compliance professionals, things like that. I don't think that's
Speaker 3: fully sunk in yet, but as the debate about clarity
Speaker 3: goes on, you're seeing more and more attention paid.
Speaker 2: To that what happens if clarity doesn't pass?
Speaker 3: You know, I hope, I gosh, I hope we don't
Speaker 3: face that. But you know, I testified after I talked
Speaker 3: to you guys. I testified in the fall last year
Speaker 3: in House Financial Services, and I laid out pretty cleanly
Speaker 3: that you know, the existing statutory authority. I just agreed
Speaker 3: with Gary Gensler when he said the existing securities laws
Speaker 3: accommodate crypto. I disagree with that because the existing securities
Speaker 3: laws literally didn't from an infrastructure standpoint, you know, all
Speaker 3: the things we talked about with tokenization, all that, they
Speaker 3: just don't allow for it. Right, They issued disclosure pieces
Speaker 3: all this. But the existing securities laws, as modified through
Speaker 3: the use of exemptive authority at the SEC, can accommodate crypto. Right,
Speaker 3: Maybe not in a way that you'd like. Maybe you'd
Speaker 3: prefer Congress to act. I would, given what the current
Speaker 3: Supreme Court has said about you know, major issues and
Speaker 3: other things like that, Right, I would want a little
Speaker 3: more certainty from Congress. But if the SEC used the
Speaker 3: exemptive authority that was given to it by Congress in
Speaker 3: nineteen ninety six in Ismia, right, which was I mean
Speaker 3: a brilliant stroke by Congress at the time and again
Speaker 3: hugely bipartisan, where they said, geez, things are moving fast
Speaker 3: in markets. Let's give the SEC this exemptive authority that'll
Speaker 3: allow it to kind of with a scalpel, exempt people
Speaker 3: from certain provisions of the securities laws to accommodate new technologies,
Speaker 3: changes in the markets and the like, and people forget that.
Speaker 3: Back in ninety seven, the sec under Arthur Levitt used
Speaker 3: that authority to create Reggaets. Right. They saw these platforms
Speaker 3: that were rising and were great as far as efficiencies,
Speaker 3: and we're driving prices down, good for investors, but they
Speaker 3: kind of were in exchange. And instead of saying you're
Speaker 3: all in exchange and putting them out of business, they
Speaker 3: came in creating Reggaets and you know, a thousand ships
Speaker 3: sailed from that and so and they cite it. I mean,
Speaker 3: it's really great. And the forward to that rule they say,
Speaker 3: Congress gave us this authority so we could accommodate new technology.
Speaker 3: So section thirty six in the thirty four, which you
Speaker 3: know is the exempt of authority from NISMIA, they could
Speaker 3: use that. I know there's other provisions in the rest
Speaker 3: of the securities laws too that mirror that. And you
Speaker 3: go in, you carve it up and you say, okay,
Speaker 3: let's create a rule set that accommodates crypto. Recognize that
Speaker 3: it's temporary until Congress can finally act, but get something
Speaker 3: in place where people are registered and there's some basic
Speaker 3: investor protections provided right, some level of transparency, reporting, examination, books,
Speaker 3: and records, that sort of thing should be done, could
Speaker 3: have been done, could have been done, you know, the
Speaker 3: sec could have done it last four years. We showed
Speaker 3: them how to do it at Robinhood. When Gary said
Speaker 3: coming in register, we said, okay, here do this for us,
Speaker 3: and we will because right now we can't under the
Speaker 3: securities laws. And we came in asked for no action, relief,
Speaker 3: exemptor relief, whatever it was, and showed them where the
Speaker 3: rules don't work, and they had no interest none.
Speaker 1: I wanted to shift topics a little bit because this
Speaker 1: is another area that's been in the news a lot,
Speaker 1: prediction markets, particularly as it relates to sports events, and
Speaker 1: how we should think about event contracts in relation to
Speaker 1: sports gambling. I know robin Hood and CALCI have both
Speaker 1: received cease and desist letters from various states such as
Speaker 1: New Jersey and Nevada, you know, concerning event contracts on
Speaker 1: sport and events, and some of the states say that
Speaker 1: the contracts represent unauthorized sports gambling. I'm following a couple
Speaker 1: of cases where CALSI sued New Jersey and Nevada, and
Speaker 1: it'd want preliminary rulings, essentially allowing CALS to continue offering
Speaker 1: those event contracts at least for now as the litigation
Speaker 1: plays out. I think Robinhood sort of took a little
Speaker 1: bit of a different approach, and I know in a
Speaker 1: couple of instances they removed the event contracts from their
Speaker 1: offerings related to March Madness and the Super Bowl. I'm
Speaker 1: I really am interested in and your thoughts on how
Speaker 1: we should just generally, how should we think about event
Speaker 1: contracts when it comes to sports, you know, how is
Speaker 1: it different from sports gambling. And I'm curious also why
Speaker 1: robin Hood sort of took a different approach than Cal
Speaker 1: she did by removing those contracts rather than trying to
Speaker 1: contest them in court.
Speaker 3: Yes, so, look at the highest level, I think prediction
Speaker 3: markets are incredibly exciting. I think it's an awesome I mean,
Speaker 3: it is an asset class I just but I actually
Speaker 3: just think it's such a useful tool. You know, we
Speaker 3: ran the presidential election contract on our platform. I mean
Speaker 3: it was like spot on. I mean, I don't even
Speaker 3: know if there was any deviation from the actual results.
Speaker 3: It was so much more informative than what you'd read
Speaker 3: in the polls. That. You know, it really just proves
Speaker 3: the power of the crowd, you know, is is very mighty.
Speaker 3: So so at a general level, I think it's it's great.
Speaker 3: But you do then get into some pretty thorny issues, right,
Speaker 3: what what should the limitations be on what those contracts
Speaker 3: can cover? Elections are one thing, and the judge in
Speaker 3: the Calcie case in d C said those are not prohibited,
Speaker 3: that those those can be you know, covered by the
Speaker 3: CEA and and and that was the case against cal Case. Yeah,
Speaker 3: and I think that was the right decision by the
Speaker 3: court there. And you know there are proscriptions right in
Speaker 3: the wall that say you can't you know, national or
Speaker 3: you know, you couldn't have like assassination odds or things
Speaker 3: like that. That really but that's a slippery slope from
Speaker 3: a policy perspective. What's okay and what's not right? There's
Speaker 3: the main body of event contracts and prediction is pretty obvious, Right,
Speaker 3: is the FED going to raise rates? You know, Uh,
Speaker 3: is there going to be a hurricane in the Gulf?
Speaker 3: You know in August that those sorts of things, Uh,
Speaker 3: you know, elections are another flavor. And then of course,
Speaker 3: you know, you get into sports and you know, I
Speaker 3: would say, you know, to your question, we're all about
Speaker 3: providing access to our customers to everything that is suitable
Speaker 3: for our regulated entities to offer. So on the brokerage side,
Speaker 3: you know, it's we do the listed equities. We do
Speaker 3: three hundred bulletin board stocks that are really mostly eighty
Speaker 3: rs of big blue chip companies. We have you know, crypto,
Speaker 3: but that's a limited offering, you know, to we choose
Speaker 3: what we want to offer on the crypto side, and
Speaker 3: that's generally more liquid instruments and the like. And then
Speaker 3: on the event contract side, this is still evolving right that.
Speaker 3: You saw Russ Benham, who's terrific by the way, you know,
Speaker 3: proposed a rule that would have prohibited you know, any
Speaker 3: types of sports e end contracts. That that rule is still,
Speaker 3: i guess technically pending. So the CFTC has kind kind
Speaker 3: of caught midstream right now. They started policymaking, they didn't
Speaker 3: conclude it. There was litigation. The litigation muddied it up
Speaker 3: a bit, and in the meantime, you know, Calshi and
Speaker 3: crypto dot Com I think and ibkr's entity have been
Speaker 3: offering the contracts. We got our registration, you know our
Speaker 3: FCM registration and we're able to provide access to those
Speaker 3: you know, through CALSHI, through others, and you know, have
Speaker 3: decided to do it when we were threatened, you know,
Speaker 3: with by states saying hey, we think this is illegal.
Speaker 3: We've been trying to be very deferential to the states.
Speaker 3: I get it, like intellectually, practically speaking, I understand where
Speaker 3: they're coming from. Right, you have states like New Jersey
Speaker 3: and Nevada that look at the institution of gambling in
Speaker 3: those states, right, it's critically important to those states tax revenues,
Speaker 3: I mean, the number of people employed. Like it's just
Speaker 3: a big deal. And you know, I think at Robinhood,
Speaker 3: we've decided to look, so many of our customers are
Speaker 3: interested in either sports, betting off you know, using other apps.
Speaker 3: You know, they're there have other accounts. Maybe we you know,
Speaker 3: instead of them going off Robinhood, we could offer this here.
Speaker 3: Whether that be whether a state regulated product or a
Speaker 3: CFTC regulated product, you know, is still a bit of
Speaker 3: an open question. But in the meantime, since the CFTC
Speaker 3: regulated product has become available, and quite frankly, you know,
Speaker 3: the courts of affirm that there's preemption we're offering it,
Speaker 3: you know, expecting that there'll be more clarity down the road,
Speaker 3: right that eventually we already have a built in circuit
Speaker 3: split you know in the court that the Supreme Court
Speaker 3: will eventually get pulled in and and weigh into it.
Speaker 3: So we're trying our best to be respectful of the
Speaker 3: interests of the states, the Indian tribes. We're not saying, oh, geez,
Speaker 3: you have you know, oh, we totally disregard your interests here.
Speaker 3: But at the same time we're trying to balance that
Speaker 3: with what the customers want and quite frankly, if it's legal,
Speaker 3: we should be able to provide it, and in the
Speaker 3: courts of affirm.
Speaker 1: That it is.
Speaker 2: So it's my my pleasure to come in with the
Speaker 2: most difficult question of the day. Last year, we asked
Speaker 2: you what three pieces of music you would take on
Speaker 2: a desert island, and I think you two is the
Speaker 2: almost the immediate answer that came out, you know, from
Speaker 2: from your answer.
Speaker 3: So I have a different question today.
Speaker 2: Let's say that you're going to go over to your
Speaker 2: London office and you've got seven hours on a plane.
Speaker 2: What types of television or movies are you bringing with
Speaker 2: you have you seen anything recently that really is you know,
Speaker 2: you're thinking some great quality work.
Speaker 3: You know. I've been on a little bit of like
Speaker 3: a Netflix binge thing, and I'm fortunate. I'm like, I'm
Speaker 3: coming up dry. I've seen it all right, and I
Speaker 3: and I fly you now you a lot, and so
Speaker 3: I'm kind of stuck with whatever. You go to that
Speaker 3: box collection thing on United TV, and and I made
Speaker 3: it blissfully. I've been flying to some pretty far from places,
Speaker 3: so I made it all the way through Landman two
Speaker 3: seasons on Netflix, and that was unbelievable. Billy Bob Thorton.
Speaker 3: I mean just I had no idea what to expect.
Speaker 3: I heard from one of my colleagues, this is great.
Speaker 3: I didn't even know what it was about. And I
Speaker 3: just it's like, he's so incredible, and it was, you know,
Speaker 3: I was I think I landed in Dulles and I
Speaker 3: still had like ten minutes left of the last one.
Speaker 3: I'm like, oh god, oh god, I hope the gage's
Speaker 3: not open, you know, that sort of thing which never
Speaker 3: happens the plane. I was like, because I can't watch
Speaker 3: it home, I can't pick it back up.
Speaker 1: You know.
Speaker 3: I love Yellowstone and all the prequels and sequel I
Speaker 3: just think all of that is so well done. Unfortunately
Speaker 3: I've run my course on that one too. I kind
Speaker 3: of like, you know, I kind of like, you know,
Speaker 3: some of the you know, war movies or you know,
Speaker 3: that whole genre, you know, whether it be you know,
Speaker 3: some of the you know, World War two movies or
Speaker 3: other things. I always get a kick out of those,
Speaker 3: the modern, more modern ones, you know. Like I mean,
Speaker 3: I sort of got I watch American Sniper like every time.
Speaker 3: I can't get past it. Every time I'm like, oh,
Speaker 3: maybe I'll just watch a few minutes of it, and
Speaker 3: of course two hours later, you know, my head's turned
Speaker 3: and I've watched the whole thing again. So but I'm
Speaker 3: kind of it's like my you know we talked about
Speaker 3: with music, I'm kind of all over the place, you know.
Speaker 3: I like taking recommendations from folks, and I kind of
Speaker 3: like watching a little bit of a little bit of everything.
Speaker 3: But I have a nineteen hour flight coming up on Sunday,
Speaker 3: so h Lucas Moskowitz our GC here and I've been
Speaker 3: talking about, like God, we got to download some stuff
Speaker 3: because I don't think the airline has enough to keep
Speaker 3: me interested.
Speaker 1: Yeah, although you'll maybe you'll wind up watching American Sniper
Speaker 1: ten times.
Speaker 3: Well, what you guys have any recommendation for me?
Speaker 1: Yeah?
Speaker 2: If I don't know, if you know Star Wars, but
Speaker 2: and Or season two was amazing. I mean it's it's
Speaker 2: not just a sto Wars, but I really really.
Speaker 3: Like that one on North season two.
Speaker 2: Okay, just watch season one in season two, Okay, Okay.
Speaker 1: We just started watching The Waterfront, which we really enjoy
Speaker 1: so far. Oh okay, Unfortunately, I think we're going to
Speaker 1: have to leave it there. These were great recommendations, Dan,
Speaker 1: and as always, really great insights into our evolving markets
Speaker 1: and the evolving regulatory landscape. We really appreciate you coming
Speaker 1: back on votes and verdicts and sharing your time and
Speaker 1: insights with us. We hope to have you again soon.
Speaker 1: You're I believe, only our second repeat guests so far,
Speaker 1: so maybe you'll be our first free pet fun. I'll
Speaker 1: accept the invitation if you'll have me awesome and our
Speaker 1: safe travels on your upcoming flight. And as a reminder
Speaker 1: to our listeners, you can read all of our Bloomberg
Speaker 1: intelligence research on the Bloomberg terminal at Big With that,
Speaker 1: thank you again and have a great day.