Bankless - Senator Pat Toomey's Concerns about the SEC & Crypto

Starting point is 00:00:04 Welcome to Bankless, where we explore the frontier of internet money and internet finance. Today on the episode, we have Senator Pat Toomey, the senator out of Pennsylvania, who's also on the Senate Banking Committee, who's got some thoughts about the state of crypto and the state of regulation inside the United States. And what we should do about the fallout of FTX, all of that mess, Gary Gensler, the SEC, and how we need to move forward both as an industry and also what the role of. regulators and legislators like Senator Pat Toomey need to do to help promote this industry here in the United States. This is a first for Bankless. We've never had a senator on before. So we were honored when Pat Toomey's office reached out about getting Pat onto the show. So we did a 30-minute live stream where we asked some of the hottest questions that we could think of to squeeze into 30 minutes. I hope you guys enjoy this episode. But before we get to the conversation with Senator Pat Toomey, first we're going to

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Starting point is 00:03:26 a very important committee. He's also in the past been somewhat friendly to crypto and some of the things we've been up to. Senator, welcome to bankless. It's great to have you. Thanks for having me. Can we start with a big picture? We want to cover a few things today.

Starting point is 00:03:40 We want to talk about FTC's and some other things. But can you give us the big picture of the upside, the potential that you see in crypto? Why have you defended it before? And how do you think it might help the American people? Well, so here's the way I think about this. when the internet first came along and we could exchange emails, that was great. And at that point, it never for a second occurred to me that someday, like all consumer products would be happening over the internet, that I'd be able to use an iPhone to hail a car.

Starting point is 00:04:22 I mean, the list is endless. It was so transformative of our entire economy. So now I look at what crypto means to me, and I think of different crypto projects as like these various protocols. And a lot of them are like operating systems on which people can run these apps that are going to do all kinds of things that probably exceed my imagination as much as. everything we take for granted today exceeded my imagination back in 1999 when I first started doing emails. So I don't know all the way. I mean, there's the obvious categories like payments and identity verification and ownership issues and things like that. Those those are already pretty clear. But I think the potential of this sort of freestanding, independent, disintermediated,

Starting point is 00:05:20 software is enormous. And I'm not necessarily sold on the value of any particular token, but I don't think it's really about the value of individual tokens. I think it's about the underlying technology. So your argument is this is an important underlying technology like the internet. It's innovative in that capacity. Can we frame the question another way and ask it the opposite way, which is like, what's at stake if the U.S. misses crypto? I mean, the U.S. is very supportive from a regulatory and legislative perspective of the Internet in the 1990s. Right. What's at stake if we don't take a similar approach to crypto now?

Starting point is 00:06:03 Well, an amazing, maybe completely transformative wave of technology happens somewhere else. And someone else, and I don't know where that is, maybe it's dispersed, maybe it's concentrated, probably happens in a context. that's not entirely consistent with things that we value very much, like the rule of law and intellectual property and privacy. And who knows, the kind of jobs and the economic growth that we would be foregoing. And frankly, probably even national security issues. So I think it would be unbelievably misguided for us not to create an environment where Americans can drive this technology.

Starting point is 00:06:52 Is Capitol Hill talking about maybe what China is doing in the blockchain space? Just like there are different kinds of the Internet, there's the open Internet, and then there's sort of a more closed Internet behind firewalls. China is very active in what it called, like the blockchain space, but it has its own centralized technology that's kind of replacing it. Is there any talk in Capitol Hill of what some of America's competitors are doing and keeping up with them? Or are we even talking about that right now? Yeah. There's some discussion about that.

Starting point is 00:07:34 And one of the ways that comes up a lot is a discussion about a central bank digital currency. As you know, the Chinese have already deployed one to a pretty significant extent. and look, I think their motivation is pretty bad. I think a lot of their motivation is the dramatic extent to which it enhances their ability to surveil their population. And they would love to see adoption everywhere it's possible because then they could surveil everyone else too. I don't like the idea of authoritarian regimes having those powers.

Starting point is 00:08:09 By the way, I don't want the U.S. Federal Reserve to have those powers either. But to your question, yes, it's come up. And one of the questions that people have wrestled with is if the Chinese are using a technology that allows their currency to be used in ways that a dollar can't, does it give them an advantage and give them an opportunity to erode the presence of the U.S. dollar as the leading reserve currency in the world? My own view is there are other reasons why the dollar is the reserve currency of the world, and it's hard for the Chinese to displace us, especially given their closed and authoritarian society. But why wouldn't we want to have the most technologically sophisticated currency in the world? By the way, that doesn't mean a central bank digital dollar. I think stable coins issued by private issuers can play that role. but I want the dollar to get a huge advantage to Americans for the dollar to be the leading reserve currency and having stable coins proliferating will enhance that.

Starting point is 00:09:21 Senator Toomey, I know you're a big proponent of some stable coin regulation. I definitely want to get there later in this conversation, especially after we talk about some of the role that the SEC has to play in how crypto is regulated. But of course, we would be remiss to talk about or not talk about the fallout of FTX. And I'd just like to take a peek into what the current state of Capitol Hill is now that we are hearing this news about FTX. What is the gossip? What is the conversation that's happening with regulators on Capitol Hill about this news? Well, actually, you know, we had a hearing this morning where we were evaluating nominees, mostly for the governance of the FDIC, and this came up.

Starting point is 00:10:07 And you could actually get a real sort of condensed version of this discussion. I had some colleagues who have used the collapse of FDX as a way to paint the whole sector with this broadbush to damn everything. Crypto is all a big scam. And thank God you're doing everything you can to keep it out of our. the real economy and so on, right? I've tried to make the argument that it's a profound and fundamental mistake to confuse bad action by a bad actor with the asset with which the bad action occurred, right? So what do we know about FDX?

Starting point is 00:10:51 We know that they took customers' assets and lent it to a related hedge fund, apparently, or, you know, family office, whatever you want to call Alameda, that's like wildly inappropriate to do that, right? In any kind of financial service that does that, it's outrageous. But guess what? It's been happening in the Fiat world forever. I mean, there's an endless list of financial institutions in the conventional, old-fashioned form who've done the exact same thing. And by the way, people who've gone to jail for having done so. is not a new offense, and it is not at all specific to crypto. Like I've said, you know, the code committed no crime. But somebody looks like they probably did commit crimes. It's crazy to blame it on crypto. You said that, Senator? You said the code committed no crimes?

Starting point is 00:11:50 I did. Are you alone in this chant in Capitol Hill with the regulators? That particular one, the code committed no crime, I might be. We might steal that from you. What about just like the broad concept of FTX and Sam Bankman-Fried are not crypto, are not defy, and this was a centralized actor doing fraud? Like, are you the only person telling this story or other people? I don't think so. I don't think so.

Starting point is 00:12:15 I mean, look, so in the House, let me just be completely candid here. In the House, there are Democrats and Republicans who are very open to this new technology. You could say pro-crypto, want to get to a thoughtful. sensible regulatory framework that's going to work. In the Senate, unfortunately, it's become a little bit polarized because the most outspoken Democrats have been extremely hostile to this whole space, while I and some of my Republican colleagues have been very open to this and, in fact, enthusiastic about what is possible. There are Democrats, let me be clear, there are Democrats in the Senate who are pro-crypto. Definitely, I work with some of them. We have.

Starting point is 00:13:00 have legislation together, there is a very real likelihood even that we'll do bipartisan legislation soon. But there's been a little bit of polarization. But no, I'm not alone in defending the proposition that what Sam Bankman Free did cannot be blamed on crypto. Is there any way to convince your more skeptical colleagues, Senator Toomey, or what would it take to convince them? Or do you think some are just, they've made up their mind on this and nothing could happen. No facts, no arguments could convince them otherwise. So some are definitely in that category. They made up their mind. They don't want to hear the facts. So we're not going to win them over. But there's a lot who just don't know about this, just haven't had the time,

Starting point is 00:13:43 taken the time, had the interest to do the work. And let's be honest, you know, it takes some work to understand how this goes, especially if you're, you know, an old geyser like me who's grown up with this whole life in the fiat world, it takes some time and effort to understand the nature of this technology. It's two things that I think are important ways to communicate with people who are still open-minded about it. One is get people to not necessarily focus on a particular token, like what's a doge coin worth and how does it change when Elon Musk puts out a tweet or like like that is like kind of ridiculous to focus on that and make that your understanding of this but rather think about the technology think about a series of operating systems

Starting point is 00:14:36 that are going to make make processes and applications possible that could never be possible before oh and by the way make it possible without a central intermediary taking a fee out i mean my friends on the left should be very enthusiastic about the possibility of, you know, bypassing the central intermediary, right? They take a lot of money out of transactions. It's their business. You're talking about the banks. You're talking about credit card processors. Everybody in the, look, how about the folks that, like, validate title insurance? I mean, why the hell do we pay so much money for things like validating ownership? There's a much better way to do this. So the list goes on and on, right? And if what I think we haven't done a good enough job is explaining to people the practical

Starting point is 00:15:27 real world applications that are in the works, some already up and running like file storage, and things that are coming down the pike. And it's hard, right, to talk about what's possible in the future and what could be coming. But I think getting people to focus on that rather than, the latest collapse of, you know, Terra and Luna would help a long way, go a long way. Well, it's certainly rare to be able to see through the forest for the trees in the crypto industry and understand the technology is separate from the actual expression of what we see today. And it's even rare that these people are regulators and are elected representatives. So, Pat, thank you so much for being able to see through the noise.

Starting point is 00:16:11 It's difficult. This industry makes it very difficult to do that. I know that there's a Senate hearing tomorrow about the FTX collapse from the Senate Ag committee. Are you privy to what might be discussed there? What can we expect to come out of that hearing tomorrow? Do you have any insight there? So I'm not on the committee, and so I really don't know exactly what's going to happen.

Starting point is 00:16:34 I don't know how this plan. I'm not even sure who all they've invited to testify, but I hope it represents people who can make a persuasive case to look at this for. what it is. A very bad actor that did some very bad things and we need to get to the bottom of it. And let's by all means look into that. And I think the Department of Justice is looking into that as well as they should. But I hope that gets separated from the underlying technology. I think there's a myth and people put forward about crypto like people in crypto don't want regulation or they don't want legislation. And the reaction of that is like, no, like we want

Starting point is 00:17:11 reasonable, good regulation and legislation that protects kind of values that this country was founded on. And it doesn't stifle innovation. Is that too much to ask? I want to ask, people listening to this podcast might not be as familiar with how laws are kind of created and how the different committees work together, right? There is the DCCPA that was talked about recently, which is some legislation, I believe, coming out of the Ag Committee. Is anything going to happen with that? Do we know anything about that? And like, how do the different various committees talk about crypto legislation?

Starting point is 00:17:50 Like, what are you seeing from your perspective on the legislative front? Well, there's a lot to try to unpack there. Part of the challenge is that the Senate's not functioning, the way the Senate should be functioning, the way the Senate actually functioned when I first got to the Senate, which is not like, different century or anything. So the committee process isn't working well, right? The way it should work is if there's committees that have overlapping or tangential or related jurisdiction,

Starting point is 00:18:21 they should each produce irrelevant legislation. And then you work out the differences. You put that on the Senate floor. You have a big debate. You have amendments. And something passes. And meanwhile, the House should be doing the same thing. Now you've got two different products and you have a conference where you iron out the differences and you end up with a single product that is the consensus that you can achieve through the conference and then you take that product back to both chambers for an up or down vote. That's the way, that's the textbook way that it's supposed to work. That is the way that it used to work, including when I first got to the Senate, but it's not working that way now. So unfortunately, we've devolved to a situation where what happens is so you could take

Starting point is 00:19:07 my legislation to fix the broker definition in that came out of the infrastructure bill from a year and a half ago where you could take my stable coin bill. I look to find a Democrat counterpart who is going to be a champion on their side. I act as the champion on my side. We try to get broad buy-in. And then we get the key players who are the gatekeepers for extraneous legislation going into a must pass bill, of which we have three or four typically every year. And this is a very opaque process, which is part of what's so bad about it. But that's what we're left with at this point. And frankly, I'm going to use that process to the maximum extent I can for some of my crypto priorities.

Starting point is 00:19:56 And the year's not over yet. We still have a shot at getting some of them done this way. But it shouldn't work this way, but that's where we are at the moment. One of the big reasons why this FTX disaster got so big was because a lot of the lack of clarity that's on the inside of the United States for our own regulated crypto institutions like Gemini and Coinbase. They just haven't been able to produce some of the products that were so attractive that FTX was able to produce because they were in the Bahamas. And a lot of the ire out of people in the crypto space has been directed towards Gary Gensler and his hard-handedness towards American companies. and his also neglect of external companies like FTX. Is there, what's the, is there any, do you share in that frustration of Gary Gensler and the SEC or what's the role, what's the opinion of that, of Gensler's administration by your fellow regulators?

Starting point is 00:20:51 Well, let me just tell you, I have been arguing with Gary Gensler publicly and privately for two years now, since he took this job. And the central argument that I make, my, my central problem. is to say, Mr. Chairman, you have repeatedly stated that virtually every token is a security. I don't happen to agree with that, but given your assertion, you owe it to us to lay out publicly a very clear way in which people who want to comply with the law and regulation can do so. How does an issuer comply? What is the criteria? What is the rules? How do they do that? If you're operating in exchange, what does that mean? What do you have to do in order to be in compliance with SEC?

Starting point is 00:21:41 The rules that we have for a stock exchange, for instance, don't all apply, right? I mean, custody and settlement and things like that, it's different in crypto. And my big criticism of Chairman Gensler is he has never laid out that clarity. He says, oh, come on in and talk to us and we'll talk to you. But that's no answer. By the way, during those conversations, their enforcement lawyers are in the room, taking down notes, and next thing you know, you get hit with an enforcement action. Regulation by enforcement is a terrible, terrible approach. And the problem with this uncertainty that hangs over just about everyone

Starting point is 00:22:20 who's developing a protocol is they don't know whether there's going to be, you know, there's going to be a knock at their door from the SEC about what they've done. And so, So the SEC has created the incentive for people to go offshore. This is terrible. It's terrible because America loses the opportunity to have its leadership role in this space. It's terrible because when they go offshore, they're going to go to a place that has a very lax regulatory environment. Then customers are going to experience the kind of things that we've seen at FDX. So at all levels, this is a disaster.

Starting point is 00:22:58 This is why Congress needs to step in, provide. the guardrails, create the clarity, and let the regulators, which may or may not be the SEC, but let whoever we authorized through legislation, objectively enforce the law, and provide that certainty. It would be so helpful for this whole space. By the way, I think everyone in crypto, maybe a lot of people listening to this, saw your clip of you putting Mr. Gensler on the hot seat and asking those questions of like, hey, what actually is a security? Like, can you define it? well done. We appreciate you asking those questions because obviously we're not in the chambers

Starting point is 00:23:37 in the halls where those questions can be asked. I do also, like I guess if you were to steal man a regulator's argument on this or Derry Gensler's argument, maybe he'd push back and point to Congress and say, hey, we don't have clarity. We don't have clear. No, that's not his argument. Right. That would be understandable. You could. A reasonable person could say that. I could say, well, look, the securities law and the case law, right? Securities law, to a large degree as court cases that have emerged over decades. The how we test. The how we test being one, right?

Starting point is 00:24:12 These are not well suited for this brand new technology. So rather than try to bang a square peg into a round hole, Congress, why don't you address some of these difficult issues, like under what circumstances is a token, actually, a security? under what circumstances is it not, for instance. But they won't do that. That would be reasonable if Gary Gensler said that. But he doesn't say that. He says, everything's a security.

Starting point is 00:24:38 It's all my territory. I own it. And by the way, I'm not going to tell you how you can comply with my rules until I show up and whack you with an enforcement action. That's what's so objectionable to me. Why? Why is it objectionable? No, why is he doing this?

Starting point is 00:24:56 Why is that the approach of a regulator? I'm not sure, is the honest truth. I don't know. I have asked him this. He would, of course, completely reject my characterization. He would say, I've done nothing of the sort. I've been very clear. The law is very clear. Everybody can read the law. Everybody should know that their projects are all securities. It's obvious. And I don't know what you're complaining about. That's basically some version of that is what he would say. I just completely disagree. Do you think that there will be some fallout from the recent events of FTX that will come back to regulators like the SECs or the question of why didn't you do more this sort of thing? Do you think that's fair?

Starting point is 00:25:41 Do you think the SEC or CFTC could have done more in this situation? Or what's your explanation of who is at fault, I guess, in this particular situation? So there's a technical question and then there's a more. broader question, right? The technical question, to my mind, is to what extent do they actually have jurisdiction over a foreign entity that's operating out of a different, you know, political entity, right? Obviously, the SEC does not have jurisdiction over the Bahamas. But to the extent that Americans are investing or are involved, does that give them some jurisdiction? There's some legal questions. I don't really know the answer to, but these are well known, so we'll get answers

Starting point is 00:26:25 to that. The bigger question, though, the bigger fallout should be that, hey, the lack of clarity probably contributed to this whole mess. Because if we had provided clarity and we had provided clear rules and they applied to everyone, then the coin bases of the world, the other exchanges that all they want to do is be in compliance so that they can compete on a level playing field, So that's where a business would gravitate to. And you wouldn't be able to successfully operate this outpost on the Bahamas where no one would know what you're doing if their competitors had the certainty of this regulatory regime. So I would argue that what the SEC has done probably contributed to the growth of FTX.

Starting point is 00:27:14 And that's something that they ought to feel some heat for that. Yeah, I think I can speak for the entire. higher crypto industry, which we definitely feel that that was the case. That's from users who lost funds in FTX to builders like Brian Armstrong, the CEO of Coinbase, all feel very, very frustrated that the SEC created the paradigm that allowed for FTX to get so incredibly big. Senator, Toomey, what do you hope Congress does as a result of this? One thing I've learned while talking to so many legislators and regulators out there is that

Starting point is 00:27:46 everyone is saying that the solution for this mess is legislation on Capitol Hill. So if you had a message to all of your fellow congressmen and senators, what would you say? Yeah, I've been saying this for a long time. And we're late to the game, but it's not too late. Let's pass legislation. My suggestion would be let's try not to do a whole comprehensive, all things, crypto, all at once, omnibus bill. that's probably not going to work.

Starting point is 00:28:16 But we don't have to do that either. We could do a little bit. So I've got a bill right now with a Democratic co-sponsor that would fix the problem with the broker definition so that we wouldn't be technically obligating validators to come up with information about individuals behind transactions when obviously they don't have that information, right? So we can fix that. I think we actually have a pretty good shot at fixing that before this year is over. I've got a bill with Kirsten Cinema, which would allow for small transactions to be paid for with

Starting point is 00:28:50 crypto that is sold and for which there wouldn't be a capital gain. So we would alleviate the huge compliance burden of tracking all of that. But really, what I think we really need to do, let's start with stable coins, right? Stable coins are a discrete category. They're relatively easy to understand. I've got a framework out there that's very similar to the framework that Cynthia Lummis and Kirsten Gillibrain came up with. If we could get something done on stable coins, that would be like this huge step forward. I think it would be extremely encouraging. It wouldn't by itself solve all the problems. We still have the issue of how you how you decide what's a security and what's not what's not a security. But if we could if we could resolve the question of

Starting point is 00:29:38 who can issue stable coins under. what conditions, how is it regulated. I think that would be very, very constructive. Be a great first step. And then, hey, after that, we take on the next challenge. How close do you think we are to doing something like that? I'm hoping that I'm quite close to announcing a bipartisan stable coin bill. Getting it across the goal line this year will still be very difficult.

Starting point is 00:30:04 I'm not going to kid you. I think we could get to a, you know, introducing a bill that has a bipartisan list of co-sponsors, and that's a huge step in the right direction, right? The House was trying to negotiate something between Maxine Waters and Patrick McKinry, the chair and ranking member, respectively on our counterpart committee in the House. They never really were able to quite get there. If we could get a bipartisan product that dealt with this, it put a lot of pressure on the administration to come to the table and get this resolved.

Starting point is 00:30:40 And the administration, I will say in fairness, some in the administration understand that we really should do this. We really need to get it done. The question is, can we get them to a place where they'll do it in a fashion that allows this space to thrive as opposed to be stifled? I think that's very important, and that's kind of key, right? Which is a reason I think we like Stablecoin regulation as a starting point is because at least when you're talking about the centralized stable coins, like stable coin USC from Coinbase and circle, right? These are very kind of known quantities. These are centralized products. In order to do that in a way that doesn't stifle innovation of some of the things that we're building in Defi.

Starting point is 00:31:22 Interestingly enough, it was revealed that SBF was that same Bagman-F freed behind FTX was very involved in some of the legislation behind the proposed legislation of the DCCP. And some of that felt to the crypto industry, the crypto community, like there was sort of a pulling up the ladder, an entrenchment of regulatory capture, entrenchment of larger institutions now. FDX had become an institution, these banks, and kind of a push against defy. So making certain things in decentralized finance illegal, making all front ends of decentralized finance have to register as a broker-dealer, as something. And so we're very worried about, I guess, Congress passing legislation on topics that are still emerging and not understood. Staplecoins is not one of them necessarily, but it also could be if it's done in a sloppy way. How can we prevent the sloppiness?

Starting point is 00:32:23 Look, there's always a danger of that, but I think the danger is greater if we do nothing, right? Because if we do nothing, then I expect the administration to act. And then you'll have regulators simply declaring that they have the authority. They'll find a lawyer who can make the argument. And that might be extremely hostile to the space. Look, I have a lot of respect for the governors of the Federal Reserve, for instance. However, I'm also of the view that it is like fundamental to the DNA of a central banker to be very hostile to anything that faintly resembles privately issued money.

Starting point is 00:33:00 So I don't want them regulating the space because I don't. don't think it's really good to be well and then treasury there's there's a whole set of reasons but but still there's going to have to be so for instance if you advertise yourself as having an asset backed stable coin and you're you're claiming that it is backed with fiat assets then it really ought to be backed by those assets right and so a disclosure requirement where it can be proven that you do in fact have the cash and cash equivalence that you claim you have that is a really reasonable thing for someone who claims to have an asset back stable coin. But I've got some colleagues who think we should just have an outright ban on algorithmic stable coins. Well, I, for one,

Starting point is 00:33:46 I'm actually skeptical about whether you can develop a workable algorithmic stable coin. But what do I know, right? Somebody might very well figure out how to do that. So I wouldn't presume to ban it. That's a terrible idea. A disclosure, you know, making sure that somebody who's offering a stable coin that is not backed by any fiat assets, that ought to be very clear so that investors know what they're getting into. But I don't want to be shutting down whole potential categories. Honestly, this whole conversation, Senator Toomey, makes me optimistic, actually. I didn't expect all of this coming in. But I think many in crypto take kind of a skeptical lens to the legislative process and Capitol Hill, but talking to you, it's pretty optimistic. And honestly, I mean,

Starting point is 00:34:34 this is what the legislative, you know, assemblies in DC are supposed to do. They're supposed to represent the people. And crypto, after all, is a technology by the people and for the people, right? It is a technology that I think that the framers of the Constitution would very much support. I guess my last question for you as we close here, senators, how can crypto people who are maybe jaded by the politics of things they see in Washington, how can they make their voice heard? How can they get involved in the process? Many of them feel sort of powerless, but what can they do to support efforts towards good legislation in D.C. to make sure that we don't miss out on this?

Starting point is 00:35:16 So I would say that there is a very significant number of members of the House, members of the Senate, who don't know a lot about this space, don't actually have, have a well-defined set of views, but they're open-minded. They need an education. And it's much better if people who actually know what they're doing because they're active in this space, provide that education, rather than if it all comes from whatever they read on the front page of the daily paper, which, of course, is going to be the FDX blowup. So don't underestimate your ability to have an influence, especially with some. something as new to members of Congress as this space is.

Starting point is 00:36:04 Reach out, sit down with the staff that handles this. Most of them will take a meeting with you if you're a constituent. So look up your member of Congress and go have a meeting. You'll meet with their staff, most likely. But you may find that the staff is actually pretty well informed. You may find that they don't know anything about it, but engage, right? And if you are seen as a knowledgeable person who is trusted, to be a straight shooter, you'll be surprised how quickly people will start to seek your input.

Starting point is 00:36:37 That's what happens in this space. So engage, engage with your members of Congress. Good thought to end with engage in the political process as well as we are evaluating crypto to Senator Toomey. Thank you so much for your time. We appreciate you coming on bankless. All right. Thanks for having me, guys. All right. Keep fighting. All right, we'll do.

Bankless - Senator Pat Toomey's Concerns about the SEC & Crypto

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