Programmable Compliance Arrives for Stablecoins

We are so excited to welcome m zero and predicate. We love doing joint joint interviews. This will be fun. You guys can hear us? Love it. Okay. Well, we'll try to keep this orderly in terms of how we ask questions because we're not, like, we wanna do more of these types of panels. Why don't we start with each of your intros, and then we'd love to talk about some of the news that you guys have together. Joao, it's good to see you again. Familiar face of the show. Why don't you start? Hey. Thanks for having me again.

I wanna I wanna know if I'm at the top speakers. You're getting there. You're you're tied with Ben's. I think Rags has the throne. Ragoola

has the throne. Rags can have the throne. That's fine. Now for those who don't know me, I'm I'm chief strategy officer at MZero. Spent a lot of time in stablecoin land. We used to work at Circle prior to mZero, built USCC.

And at mZero, now we're trying to bring this idea of a modular stablecoin infrastructure to Barq. Awesome. Thanks for joining, Akhil. Yeah. Thanks for having me. Great great to be here. I've been looking at your guys' podcast for a little bit, so this is pretty awesome. I'm Nikhil, cofounder and CEO of Predicate. Prior to this, I have a background in digital asset policy. Also spent a lot of time at Celo where I led most of the major deployments on the Celo blockchain.

And, yeah, at Predicate, what we build is on chain compliance infrastructure for a number of different crypto native organizations. We've been working closely with MZero for some time, so excited to have some of this be public. Yeah. We build on chain compliance infrastructure. We're tackling a lot of those questions around, like, AMLCFT compliance in the digital asset space. It's a hot this is a hot topic lately, you know, with everything going with with Tethr freezing some funds today, Circle making some decisions

not to freeze funds. Help bring us into more of the relationship between mZero and Predicate. You know, Joao, I know on our last conversation, we dove into more of of the role mZero plays as as the infrastructure, obviously, working with issuers, but not always being the issuer. Where does, where do you sit in the stack with with Predicate, and how does that even influence other stablecoins being issued on mZero like u USDKY,

I think, just came out this week. And I think each week, I see a new m 0 stablecoin as well. So help us understand the the benefit there. Cool. Yeah. So I can kick it off. Maybe then, Joe, you can talk about how that relates to everything else. So what we've built with m zero is a mechanism for your various different m extensions to have automated compliance settings. So as you guys mentioned, right, like, Tethr, Circle have to think about what to freeze, what not to freeze.

We know at a baseline that you have to enforce sanctions requirements. Right? All stablecoins have to be able to do that. And so we built infrastructure where we can support can we support all many m extensions on essentially having that and making that programmatic. Right? So the idea here is that this should really be seamless.

This shouldn't be something that you need these you need a large compliance team to be able to do some of these baseline configurations requirements, and it's how can you make that automated embedded into an extension to be able to support all these different, organizations as they launch m extensions. So this really starts with those aspects of how do you actually have automated freezing, essentially, for sanction addresses.

And then from there, it's as you have some of these other custom stablecoins, you get into a world of how do I set proactive screening and proactive requirements so that way, you know, if something like how do you avoid my assets interfacing with, you know, a major exploit or those kinds of things? But, again, it's where we really sit is we plug into the MZero infrastructure and ensure and support all M extensions on having these types of, like, baseline AML configurations that they need. Yeah. It's fun.

And, actually, Nikhil and I go way back. Right? We met at USCC

time and when when Nikhil did a great job convincing me to bring USCC to sell at the time. But but we have been working with with the predicate team for for a while now. Right? So I think it's it's actually a pretty, pretty cool piece of solution that we give our our clients. You know, just zooming out a bit, the the view of the world that we have is that we stay we believe in this world where stablecoins are gonna be infrastructure for builders, for fintechs, and infrastructure should, in general, be modular.

Right? It's typically something that people deem as, like, a good attribute of infrastructure. So we we what we have done over the last few years at Mzero is to literally unbundle what it means to to be to be a stablecoin and then kind of rearchitecting that in a such a way that every every major concern around the build out of a stablecoin could be modularized. Right? So you can you can have, like, multiple solutions on the issuance layer if you build on MZero.

You can have multiple solutions on the liquidity layer if you build on MZero. And, obviously, one of the important layers or or components in the entire solution is compliance. Right? So how do you handle the various, like, requirements and needs that you have, which are going to be different for every one of these instruments. Right? Because it depends on the use case they're leveraging. It depends on the jurisdiction they're in, the requirements they're gonna have from a regulatory, from a policy point of view.

And so we at mZERO, we're not that opinionated on that also because it's going to vary from use case to use case. So the way that we work with Predicate and Nikhil and the team over time is how we integrate what Predicate does, because they have a pretty neat, like, solution for that into the mZero modules.

And effectively, what we give our builders is a ready out of the box integration, right, that says, if you want compliance and if you want to configure it your own way, we have these hooks, like in the templates for the stablecoins or the Mzero extensions, as Nikhil said, that already call out to predicate, right, already integrate to predicate and deliver for you, like, all these screenings or or compliance checks or sanction checks, whatever the requirements are.

And so this is one more example of how when you modularize the infrastructure and when you make it specialized, right, prone to specialization, you know, like predicate is the specialist. They are they are the experts in this area. There's no reason why the builders shouldn't work with them for this particular module on the stack then. That's amazing. Go ahead. Go ahead. You take it, Drew. I had the first one. Yeah.

I wanted to I wanted to just dive specifically into this morning's news around the predicate asset compliance and and what you guys specifically announced today. We have the we have the blog up. We have some of the tweet up. Maybe, Nikhil, if you want, I can pull this up as we chat. But I'd love to just dive into, like, what some of these controls actually mean, what specifically happened today, and then we can dive into a little bit of this.

I think the the framing here would be for new m extensions or existing m extensions that are thinking about rolling this out or excited to roll this out, kind of a work working session for them on what they need to know, what this unlocks,

things like that. Yeah. So taking a step back, I mean, what we've built here is a mechanism in which we plug into the asset contract as an M extension to ensure you have automated and programmable types of freezing activities that you need. So, for example, for sanctions or other types of cases. And so this is not why we're announcing it today, it's actually already live and in production by multiple folks, including, for example, consensus for MUSD. We just hadn't announced it.

And so the great part here is we don't like to do an announcement. That's not real. So it is something that's live in production at scale. But the main premise here, right, is that as as Joe was talking about is that when you have an when you have a stablecoin, you really have to navigate how do you ensure and meet various compliance requirements with when you have an M extension. And some of those involve sanctions, but it's not always only sanctions.

It's really how do I avoid interfacing with terrorist financing, human trafficking, child sexual exploitation material? Like, there's a whole number of different things you have to account for, and this isn't always cut and dry for every group. And so first, there is some baseline standards that everyone would would usually have. But then you get into a world of, like, other configurations that one might need. And an example of that is, you know, there's a major exploit that happens such as, like, Drift.

And so you could say that a stablecoin issuer might say a stablecoin project might say, look. We actually don't want our assets to be touching the addresses involved in that. And so they can either go and do these types of manual executions that will just take time, and it's not the best place that an organization should really be operating in the especially given the speed of digital assets. And so what we've built is a programmable infrastructure, and so it plugs in directly to the extension.

And so that way, any any extension group actually has a full platform that they access through. So a full front end system, they can see what assets have been frozen, why it was frozen. They can set configurations and say, okay. Great. You know, I have my base baseline configurations. They can bring in data from external providers. We work closely with folks like TRM and Blockade and others. So you have a unified compliance layer that directly plugs into the asset contract.

And all this is our view that the beauty of blockchains and digital assets is that programmability. Right? Like, that's really something that we haven't fully leveraged. And when it comes to compliance, like, we can actually do a lot of that. And then the last part I'll mention is, obviously, for us, we spend a lot of time working with regulators. And so in this case, we can actually think about what are the pieces that different builders might need and anticipate that.

So as they're operating in different jurisdictions, you know, they're focusing on different markets. They have different types of customers or partners, whether that's a fintech or a US financial institution. They can say, okay. Great. I have all the configurations I need here to be able to go and scale and sell and sell and acquire acquire users. So how much is that is that agentic? Like, I'm thinking through the example of we had Mac Brennan from Project Zero on Tuesday.

They were one of Drift's largest in integrations. They obviously kind of like what you said, they got the alert, and it was a foot race to

shut this down. It sounded pretty manual based on how he described it. Like, it was a fairly manual process. And he was proud of how fast they they dealt with it. Yeah. But it didn't seem like a programmatic

So so that's why I'm wondering, like, is this a flag where you set these parameters where if something happens with this address, then there's an agentic workflow that turns this on? Or is there like, how much of that is still it's yes. It's manual, but it's easier quicker. I I guess I'm just trying to understand the the distinction there in in in this very practical scenario.

Yeah. Let's let's go through this. So let's first talk about the manual flow. So if we talk to any of the if you talk to many legacy financial institutions or legacy asset issuers, they usually have a bit of a manual flow here as well where, you know, the compliance team hears about something or sees something. And what they then need to do is they need to say, okay. Great. I need to raise a ticket that goes to our engineering team. It has to get an engineer has to work on it and then go and execute a freeze.

As you can imagine, that will take at minimum a few hours. If not, we've seen it happen take days. So there is that is, a manual case. But to your question then around, like, is this a gen take? Is this automated? How does this work? The real question is just how do you make that determination of it is if it is something you should be executing a freeze or some type of restriction of. And that can be based off of lots of different data tools. And so this could be a blockchain analytics providers.

This could be, you know, internal data from that organization. For us, really, it comes down to, I think, the agentic part. It's not quite there yet because, AI is usually used to triage what you should be kind of flagging as high risk. But, really, at the end of the day, the decision of are you freezing it or not, it's a whole host of analytics data clustering and then some components of AI as well.

But you really wanna have a very good view around what is the the case of this data, and then it gets automatically executed. Right? So all this is executed in real time. It's really just on the back end system what types of data are being pulled in. If I can add something, I think I think a

lot of what I see the evolution of these crypto systems, particularly with stablecoins in the last few years already, I think, it's actually the realization that we we never had, like, great tools for building fintechs on top of this infrastructure in the same way that traditional fintech has had. Right? Because I I've I've worked in, like, a couple of fintech solutions in the past. And when it comes to risk and not so much, I I won't even mention, like, the the the sanctions and the some of the compliance checks.

But even for things like general risk, right, let's say you're building a fintech. There's a lot of stuff that there's a very mature market out there for assisting fintech builders with things like, you know, is this email address risky or not? Right? Should I block a sign up based on this email address or not? Is this phone number risky or not? Is is is this address, you know, this IP address?

Like, there are so many things that fintech builders over time figure that, you know, they are data points that, like, contribute to some overall picture of risk for whatever it is that you're doing, if it is an onboarding process, transaction, etcetera. And we didn't have we don't have that for crypto. Predicate is one of the leading companies in that space. But in general, we don't have that vision in crypto.

What ends up happening is that everybody who builds an app, everybody who builds an app on top of Stablecoin or even build their own Stablecoin, they redo all this stuff from the ground up, and it's insane. Like, this just, like, slows everybody down, like, so much.

For example, then in the fintech world, if there is an exploit, if there is an attack, if somebody steals a credit card number from somebody, there are vendors that say, you know, there's a block list now, and this credit card number has been added there, or this email address has been added as, you know, violated. And then, you know, all these hundreds of fintechs who use those service providers, like, stop using or or, you know, increase the the risk associated with that entity. Right?

Again, we don't have this in crypto. Everybody is, like, monitoring sanctions lists and all these things manually and doing that at their own speed, usually not fast enough, usually through a manual process.

I think the benefit of a more structured approach, like having, a company like Predicate be specialized in this being done in a programmable way that it can bind to stable assets and then have m zero deploy this as a template that's ready a template integration that's ready to go for people is that when Predicate and this this is configurable. Right? Like, people can work with predicate and say, I want this policy, but I don't want this. I don't want this doesn't apply to me.

But when one of these things happen, it can be the the reaction can be so much more effective. Right? Because, like, a predicate if their systems make a decision that certain entities or an address, for example, is not deemed kosher,

all of a sudden, everybody who uses predicate is, like, compliant from from that second on. Right? And this is super powerful, and and it saves so much time from all for all these buildings. That question for you, just we were we were kind of joking about this, which I don't know if that's the best way to cover stories like what happened with Tether and some of the stuff with with Circle. But we've we've just been looking at some of this stuff.

And for you specifically, Joao, given your background background and and some of the news that we're seeing with Drift, freezes, I think what what it looks like from our perspective are systems that haven't been built like this, systems that don't have these types of kind of preconfigured compliance and automated systems built in.

Can you speak a little bit about, like, just thoughts on what's going on when it comes to the freezing and some of the current state of things as as it relates to the issuers that are more traditionally architected,

maybe the differences there with m zero and and what's now unlocked here? I'd love to kind of compare and contrast a little bit here. Yeah. I will preface by saying that, unfortunately, this is a very complicated topic. Think I think I I sympathize with everybody who is defending, like, all sides of this argument. Right? Someone have done something, should they not have done something? I think I think there's genuine reasons on all sides for for the approaches that have been taken.

I mean, one on the one end of the spectrum, you could say that, you know, the correct principle is if you can do something, then you should do something. I think that it's hard to argue from a moral stance that, you know, that that's not the the right approach.

However, unfortunately, we live in, like, a a world of litigation and lawsuits and legal conflicts, and there are slippery slopes that if companies start doing what they think is right, sometimes they will make a mistake, and they will do things with the right intention but actually on the wrong principles. And then they will create, like, significant amount of liability for them. I'm not saying, you know, this is the case for this particular, you know, the Drift hack or this other vulnerability.

I I think it's as I said, unfortunately, it's too complicated. But I kinda sympathize that it's not an easy problem for stablecoin issuers or stablecoin builders to address. I think the correct answer here is actually on policy, actually on legislation. I think, hopefully, with rulemaking on Genius, I think it will become more clear what the actual threshold, what the actual bar is.

Nikhil, for folks who are in the industry and who understand this space, Nikhil used the word, like, threshold or sometimes people say red lines. Right? People usually know that, like, for example, all fax sanctions is like a red line. There are, like, you know, personal criminal liabilities. You don't you don't play with that. Like, you don't touch a sanction address because you're gonna get in trouble if you do that. There are other things that are more from a risk threshold point of view. Right?

Do you want to interact with this wallet? Yes or no. It's kind of a risk decision. This this part around, like, hacks, you know, this is not well defined. Like, what is that? Right? It's usually more something in the realm of law enforcement and supporting law enforcement and stop the these these, you know, bad characters, you know, recoup some of these funds. Like, that's what you actually want to solve for. And I don't think we have clear guidance on how stablecoin issuers should act.

I think I think with Genius, we will see more guidance, and then, hopefully, we'll become more clear what should be done, what shouldn't be done. Yeah. I can add to this as well. I was actually reason why I'm wearing a suit is I was just in the treasury's office, meeting with them with treasury OFAC and, FinCEN

precisely around what Joe was talking around regulation. Yeah. I think that's not clear. Right? I think if you're if you're an issuer and you're caught in one of these awkward situations where it's like, hey. Like, we we see that our asset is being held by malicious actor, but we don't they don't have but we as an asset issuer don't have a lawful order. It's very difficult for you to say, oh, I'm gonna go and execute a freeze. Do you really want to do that? Because at the end of the day, it's a property seizure.

You have to have some very strong legal position to say, oh, we have this position to say we can revoke access of your property. I think that's a big nuance is right now that's really not there. And so if you do it incorrectly, you're liable to be sued from your from users.

And so this is actually one thing that I know treasury has been thinking about, I believe it was also in the White House digital asset report, is how can you, as an issuer, have a little has some type of either safe harbor or some type of capability as to say, we we have the respective ability to say, you know, we need to pause and address for a period of time so we can investigate and make sure and inform law enforcement rather than facing potential legal implications. But right now, it's not really been defined.

And so as a result, you have companies you'll have issuers that will be hesitant to take action, right, because they don't have that legal capability to do so, and it is a massive legal risk. These are the kinds of challenges that Circle and Tethr and others are are really facing.

Yeah. It's so complex. I'm imagining that those types of configurations or customizations to those rules are are things that, you know, extension partners like Cast who might be using or working with m zero in this way, they can go in, work with their compliance risk security team, define what those standards are within the predicate system. Is that a correct understanding of it? That's exactly right. And I think the beauty of this too is regulation evolves, and none of this is also static.

The organization and their business requirements also changes over time too, like, as cast scales or as consensus scales on their NUSD.

And so the the other thing we've thought a lot about is when you've integrated predicate, then you don't have to make any new custom smart contract updates or really any types of technical changes. Actually able to update your entire policy configuration whenever you need to as a compliance team. And that's really important, right, because these things are real time. The world evolves, and especially in this industry, it changes dramatically every six months or so.

And so it's really in this case that this is all tied to growth. Right? That none of this world is static. Really, what we're trying to do is make sure that blockchain has become the global financial settlement system, and stablecoins are intimately and intricately tied to that possibility.

And so because of that, you have to have that ability to evolve over time. You know, just little philosophical here. I know, Joel, I think in our last few conversations and some of them withdrew, you like to kinda go down that rabbit hole.

And I and I think you know, was was there a mistake when we when these ecosystems or Ethereum was first architected where this should have been in place and maybe where predicate should have been, you know, integrated at the, like I said, at the layer zero foundational level, or was it better to kinda start here at this maybe overly permissionless, decentralized nature to where now people can come in and build systems on top of it?

You know, I was even just thinking of this this kinda it's like this full circle moment where we've said, wow. A lot of us get into this space for the decentralized nature, permissionless. Anybody can build. Anybody can issue their own stablecoin now, and we're saying, actually, hold on. We need to dial it back. If we truly want finance to come on chain, you know, we need to have these safeguards in place.

And we're seeing this blend of what do we want from the old system and what do we want from the new system and how is how do they kinda play nice together, and what does that blend look like? Where do you see this going? Because I see m zero, but you're really sitting at the intersection of this where we want companies like CAST that are the the the neo banks of the future issuing their stablecoins.

We want anybody else to be able to go issue a stablecoin, but we also want them to do it the right way. Yeah. No. That's that's a great point, actually. And I I do think I wouldn't say there was a mistake, but I do think I do think we got very confused, I think, as an industry. Because I think there's a very clear distinction in my mind. And now I think looking back, we understand the role that a lot of these components in crypto play. Right?

So there is a role for, clearly, for, like, a permissionless and open, like, blockchain solution or, like, blockchain substrate. And associated with that, usually, there is a role for, like, a native asset, a native token associated with that. So, you know, Ethereum, ETH, Bitcoin, BTC, etcetera, etcetera. That is a very, very foundational base layer that needs to exist. It needs to be really decentralized.

It needs to be, like, really open and permissionless because know, there's a there's a need at that foundation in the same way that, you know, when you peel all the onion off the layers of the Internet, like, at the at the base layer, there needs to be, like, a good foundation of, similarly, decentralization permissionless lesson. Like, the same thing applies to the Internet.

Because if you don't have that if, let's say, the Internet was owned by a company, let's say, you know, the the base layer was owned by a given company, it would prevent a lot of things from being built in a sustainable way on top of that. However so that so I think that most people, I think, would agree with that, that we want ETH to be, like, fully permissionless, fully decentralized. It cannot be taken away from Europe Wallet, like, no way. Right?

However, whatever you built on top of that, then a lot of people thought that by definition, it should inherit the same properties. And I think that's very questionable, right, particularly with real world assets. I think a lot of what we talk about in crypto when we talk when we talk about crypto today is, like, centralized asset issuer using that substrate to build something on top of it. But it's a centralized asset issuer. Like, you know damn well, like, who is the company behind something.

And, you know, they are using blockchain ledgers because they're more efficient. They're global yada yada yada, all those things that we know that are good. But they are still that one company that you know. And a lot of people, I think, got confused and thought that, you know, their assets also needs to be permissionless and decentralized or pseudo decentralized.

And that means that they can basically wash their hands and not really do certain things that they would be required to do were they building on more traditional rails and more centralized rails? I think that's the mistake. I mean, if you at the end of the day, if something happens with the stablecoin, for example, with the fiat collateralized stablecoin, I'm I'm talking about, like, the centralized model. Right?

If something happens with the on chain version of that, and I'll tell I'll tell an anecdote, the issuer ultimately is the the entity that will decide whether that's the correct outcome or not. So back in the day, a few years ago when ETH was going through when Ethereum was going through an upgrade, there was chatter in the industry pointing out that, you know, yes, we can debate whether the final Ethereum chain is gonna be this, you know, this version of the fork or that version of the fork.

But, actually, what is Circle's opinion? Because if Circle says that they're going to honor USCC redemptions on this chain and not on that chain, you bet that that's the chain that people are going to use. Right? So there's some things that you just cannot hide from. Right? Like, the the association and the power that these centralized asset issuers have is different, and it's not permissionless, and it's not decentralized. And and people shouldn't pretend that it is. Right? So to say that, no. We shouldn't do this.

We shouldn't take back funds, you know, because we live in a permissionless and and decentralized world. Where? Well, at what layer of the stack? Right? At the base layer of the stack, yes, we want that to be the case. We want that to be the foundation. But for centralized asset issuers for real world assets, that's not the case. The issuer ultimately will decide what's the right outcome for for an asset. They will they will rewrite the ledger if they want to. Right?

That's always a prerogative even at a regulatory level. So we shouldn't pretend that that's not the case.

Awesome. Guys, any any other, like, key takeaways or final statements around the announcement, what you're excited about in terms of this relationship? It sounds like this relationship is one that you guys personally have had for a long time. Actually, the integration and product relationship is something that has already existed. Any any, like, final takeaways or things you'd wanna leave the audience with? Yeah.

I think the last thing I'll note is I mean, I think the the great part of nZERO and how all of this is made possible, right, is because of the way they've designed their infrastructure that really

and it it it goes to, I think, Joss point around that base layer neutrality, but then you're building financial products on top of a blockchain, and mZero provides the rails for that. And that expressivity, that control, the the nuances and differences between one m extension versus another are really important. And I think that's what makes mZero so powerful on what you can do with it.

And then for us, of course, from a compliance standpoint, it makes a really, really natural fit because we also see that nuance, right, across different organizations. And this is where I think Joe and I first talked talked about predicate and m zero. This is, like, maybe, like, two years ago. And this is, like, when we were earlier days, they were also earlier days too. But it was, again, this view that people people are going to be building financial products and blockchains, and stablecoins are core to that.

And MZero's capability on what makes that possible is really, really powerful as a result. Yeah. It's, last last quick quick, like Oh, go ahead. Granular question. Is this something like, if I'm on the Cast side, what user experience am I actually doing this? Am I in, like, an m zero dashboard and these things are embedded white labeled, or am I doing this in predicates dashboard, or is that flexible in terms of how it works now? So if you're a Cast Stablecoin user, you wouldn't actually realize any of this.

The only people that would would actually be the cast organization

that's defining these configurations, and that would be done on the predicate platform. So the process is, like, m zero has someone who's coming up as an m extension. They introduce they basically connect us. We onboard them onto our platform. We give them access. We have secure access to all of that. We create a Slack channel with them, and then Great. Say, alright. Great. Great. Set this up. Cool. Just wanted to clarify that. Joao? No. I think, yeah.

As Nikhil said, like, we have been ideating on this for a long time, and the the product is live. The integration has been worked on for a while now. I think now we're at a point and that's why I agree with Nikhil. Like, we should always announce these things when they're actually meaningful and robust. Now we're at a point, right, Nikhil, where we are actually scaling. Right?

So we have we have MetaMask and a a couple of other teams, like, operating with this solution already, you know, having a their stablecoin built on m zero and having the compliance and sanctions checks and other verifications like powered by Predicate. Now we're at a point where at mZero, you know, as part of our go to market motion, when we have a new client, we always hand them over to Predicate.

We always hand hand them over to Nikhil and the team and recommend this as a solution for their screening and compliance and risk activities. There are some cases where, honestly, we even mandate it. We even highly, highly suggest that people utilize their solution because it the feedback that we get is great.

Like, you know, when people realize that they have this this option and they don't need this is another concern that they can check off their list and not really have to build anything about it, people get super excited about it.

Awesome. Well, cool, guys. Thank you for taking the time. It's awesome to be able to host and go into partnership announcements like this. Just, yeah, for each of you as more of these really interesting things come to life in your own businesses, we'd love to be a part of going a level deeper. I think as we think about why this show exists and the the service of the industry that we wanted to have is to really help serve as, like, making things make sense for people. And and announcements

like this are really great to see, and thank you for giving us the time to dive into it. Nikhil, look out for some key quote tweets today with some clips on top of your announcement. That really think of that's, like, the nice pairing. There's there's news going out. We wanna help cocreate content that supplements that news and provides that context. No. I appreciate it. Yeah. Thank you so much.