On The Brink with Castle Island - French Hill (R-AR) on Digital Asset Legislation (EP.547)

Episode Date: July 19, 2024

Representative French Hill (R-AR) join the show. In this episode we discuss: Representative Hill's perspective on the blockchain/digital asset ecosystem and why he initially became interested in this technology. The status of SAB 121 repeal. FIT 21 and the future of market structure clarity in the United States. The prospects of stablecoin legislation and the issues that are being discussed in Congress. Tigran Gambaryan's unlawful detainment in Nigeria. To learn more about Representative Hill's efforts please visit his website.

Today on the podcast, I sat down with Representative French Hill. He is the representative of Arkansas's second congressional district, and he serves as the vice chairman of the House Financial Services Committee and the chairman of a new subcommittee that is focused on digital assets and financial technology. Representative Hill has been a big supporter of keeping digital asset innovation in the United States, and he's been pushing back aggressively on the anti-innovation stance of the current administration and the current SEC leadership. I think you'll enjoy this episode, So without further ado, here is my conversation with Representative French Hill. Matt Walsh and Nick Carter are partners at Castle Island Ventures.

All of these expressed by them or the guests on this podcast are solely their opinions and do not reflect the opinions of Castle Island Ventures. Guest and hosts may maintain positions in the assets discussed in this podcast. You should not treat any opinion expressed by anyone on this podcast as a specific inducement to make a particular investment or follow a particular strategy, but only is an expression of their personal opinion. This podcast is for informational purposes only. Brought down by Bad Mortgage Investments, Lehman, which has 25,000.

and employees will be liquidated. The federal government loans American International Group, AIG, $85 billion. This is a different kind of market, and the Fed is asleep. The federal government is stepping it to stabilize Fannie Mae and Freddie Mac, the two mortgage giants

that have been threatened by the housing crisis. The Bank of England has pumped 75 billion pounds more to Britain's ailing economy with a new round of quantitative easing. You print a couple trillion dollars, and all of a sudden, people start to worry. So out of this worry, we have something called the Bitcoin.

Bitcoin. Well, Representative Hill, thanks so much for joining us on the podcast today. I've been following your work from afar for a long time, so excited to finally chat with you. Well, it's a fantastic opportunity for me to be with you, so thanks for the invitation. And we're going to talk about a lot of crypto and digital asset related things today, and obviously that's the core thrust of the podcast. But I'd be remiss if I didn't ask you about the events over the weekend with the assassination attempt on President Trump and just the state of affairs and how you're seeing things right now from the political perspective. Well, of course, it was a tremendous shock to the whole country to see this extraordinary,

horrific act of another attempted assassination of an American, in this case, former president, but candidate for president. Of course, this has been a big part of American history, unfortunately, for our entire nation's life for 248 years. But I've been in and around working for presidents or doing presidents. presidential advance for four decades. And I was really dumbfounded that the Hutterway shot, the peripheral side shot to that dais was open like that. That is just unheard of. It's a violation of Secret Service Advance 101. It just does not happen. And so I don't have any doubt

that Speaker Johnson, as well as the Secret Service and the administration will have significant investigations of how that happened. Because, as I say, it's just a fundamental tenant of event, advance preparation that that not be the case. Yeah, certainly just a very sad event. And hopefully over the next few weeks, the country can come together in a meaningful way. Certainly it makes what we're about to talk about sound a lot less important, but did just want to get that out of the way. Well, I appreciate it. And I feel for the drama and the damage. that that caused, not only the loss of life of that firefighter from Buffalo, now those kids

don't have a dad and the wife doesn't have a spouse. There were other injuries. And it just is something I found horrific, sad, but also, and that's why I let off with it, inexcusable that lack of preparation put us in this position. Anyway, I agree with you that we should live from that. I've certainly tried to model my whole time in Congress, nine and a half years, that we can disagree about policy and politics and who's on top and who's not. But we need to do that in a civil way and violence doesn't answer any questions or solve any problems. And so I'm like you, I hope that the country comes away stronger from having witnessed this, another generation of seeing something this terrible. Very well said. One transition to you a little bit here. And you strike me as someone

who has spent quite a bit of time understanding blockchain, digital assets as a category. What was it that actually got you interested in the space? Well, I've always been. interested in operating systems and removing agency costs. Those are two kind of economic terms, I admit, but I'm an economist at heart. I've been an entrepreneur, my whole career, a venture capitalist, the private equity partner, a bank CEO. And so mostly my whole career has been in financial services. And it even started in the bank operating arena. I started one of the first shared point of sale ATM systems in the country back many, many years ago, back to in 1980, which is now owned by Discover.

But in that, the whole secret was how do you create a better operating system with more audit trail reliability, more efficiency, more effectiveness, and at a lower cost. And so when you think about blockchain, I mean, that's at the essence of blockchain, depending on the application. So I've always been intrigued by taking an existing analog type system. We don't say paper-based system anymore because we have moved from paper. to digitization through our operating systems, through imaging, through transaction processing, but at its heart, it's still an analog activity. And it's got a lot of people in the middle.

It's got a lot of scheduling risk, confirmation risk. And so blockchain removes some of those things, and it will do even more as it is perfected and more dollars are invested. So my first instinct was not about cryptocurrency, but it was about the operating system to remove agency costs and make systems more effective and reliable through putting those computations out on a blockchain system. That's funny. That was exactly how I came at the space. So back in 2014, I was working at Fidelity Investments. And we were talking about a future scenario of what the world would look like enabled by blockchain. And we used to call it frictionless capital market. So a lot of what you're saying about taking middlemen out of transactions, passing rent back to the users, as opposed to centralized operators.

And as someone who's been looking at this industry for many years, it's always been very puzzling to me that the U.S. has really created this regulatory apparatus that has forced people to overseas venues that are less trustworthy than some of the regulated banks, which is why this staff accounting bulletin 121 has always puzzled me. Why is this a controversial issue that U.S. banks ought to be able to play in this industry and safeguard customer assets? Well, gosh, what a great topic because it demonstrates, in my view, real ignorance on the part of players that instituted it. I mean, it really makes me think that the accountants and the lawyers working with SEC Chairman Gensler, well, you hate to say this. I mean, they just don't even understand what they're talking about.

about. Here's why I say that. And it's a blunt statement. I got it, but I think it's factually accurate. Number one, they don't trust non-intermediated custodians. And they cite bankruptcy risk and things of that nature. Okay, I got that. That's kind of point one. Point two is they have a bias against self-custody, digital wallets, self-certification on all kinds of things that you have to do when you're a self-custodian. And in the guise of consumer protection, they write this sweeping rule. But the rule doesn't understand the world as it is. And so the second big category is they didn't bother to ask anybody any questions. So the SEC does not have to submit its rules through Office of Management of Budget, OMB, regulatory review. Actually, as I've grown in my knowledge over the last four,

decades of how government works, I don't think anybody should be exempt from submitting their regulatory proposals through the clearance process. You might set guardrails, which says, well, I'm sorry, the White House can't block my rule because I'm an independent agency. You might say that. But it's the co-ordinative power, because here we had both Janet Yellen, the Treasury Secretary, Jay Powell, the chairman of the Fed, both testified before House Financial Services Committee. they were never consulted on this rule. And then I'll conclude, this rule sweeps in digital non-bank custodians, quote, presumably the target of the SEC, with all other legal custodians under state and federal law regulated by the banking systems. It's just dumb. And it went beyond digital assets,

creating legal confusion for some other asset categories for the bank. So what happened? is you have a unified front of both digital assets, crypto people, and bank custodians all saying to Congress, hey, Gary Gensler and his team don't know what they're doing. And is that really the way we want our government to work or not work? I don't think so. It's really shocking, even from a political perspective that this got vetoed, just given how much bipartisan support for the repeal and the resolution. And as you mentioned, the constituencies involved now. It's pretty rare to see the crypto industry allied with the bank lobby, for instance. And in this case, they were. So what are the prospects of Sab 121 being revisited during this administration? I know you're

working on some things from a bill perspective. Yeah. Well, let me first thank my colleagues on the committee like Mike Flood from Nebraska, former Unicameral top legislator in Nebraska, also a business entrepreneur before in Congress. He helped lead the messaging on this. And, introduced his Congressional Review Act against Santa Feather County Voting 121. So I appreciate Mike's leadership there. We got Democrats to support us. We had 21 Democrats vote with us for his Congressional Review Act, and we had even Chuck Schumer in the Senate. I believe 12 Senate Democrats voted for that Congressional Review Act. So we didn't have two-thirds to override the veto, and we basically got the same number of votes in the House. But every Democrat has walked.

up to me and said, look, this is nonsense. We don't want to really embarrass the president, but we do want this change. And so my advice to the White House would have been, you heard from Congress. Congress has done their due diligence. Congress has had hearings. Congress does not agree with the SEC. And instead of vetoing the CRA, they might have pocket vetoed it, which means just let it go forward. I mean, let it be veto without a veto. message, or the president could have vetoed it or pocket vetoed it and then issued a press release says, we really encourage the SEC to rethink this, right? And send that message, because I think that's where they are. And if they want to build any credibility back with the banks, custodians,

and the crypto industry, I think that's exactly what they should do. They should withdraw this completely and repurpose whatever their more directed thoughts are. But now I think, I think, I think, frankly, what they should do is simply support my bill, Fit 21, where we outline the regulatory framework. Can we address custody in that bill? And as you know, we had strong bipartisan support for that. So I hope we can either have the rule just simply withdrawn, and in turn, have our colleagues just connect that we should pass the Fit 21 type legislation over in the Senate.

And then we've got the best of both worlds, I think. So you mentioned Fit 21. And from my perspective, this is sort of the holy grail of this industry is to get to market structure clarity. It just seems to me like this would objectively make this a safer place for consumers. It would open up the ability for U.S. businesses to be able to compete with their non-U.S. competitors overseas. So the other thing that is pretty interesting about this bill, and I know that you've been very

active in this space, is it seems to me that this would open up the design space. for the tokenization of securities. So we'd love to just understand where that bill is today, how you're feeling about the prospects during this Congress, if not this Congress, what it looks like in the next Congress. Yeah. Well, we are making a full court press on Fit 21 because we got such a strong bipartisan support in the House.

We are talking with senators, both Democratic and Republican senators, that we should take advantage in this Congress of that hard work and bipartisan success in the House. So, for example, last week, Debbie Stabenow, a senator from Michigan, she chairs the Senate Ag Committee, held a hearing on the commodities title in this bill. She had Chairman Benham from the CFTC, the Commodity Future Trading Commission, testified.

John Bozeman, my senior senator from Arkansas is her ranking member. It was a good hearing. So we've now had a hearing. we've had Sherrod Brown, the banking committee chairman. He's a little under siege right now because he's up for reelection this fall. He made a comment to the press last week. Well, maybe we ought to consider something in the regulatory framework market structure arena. These are encouraging statements.

So, Matt, we're going to push till December 31 of this year to try to get this done through the legislative process, which means looking for a legislative vehicle to add it to, get Senate hearings, get Senate progress, or work on it during the lame duck session. If we are unsuccessful, this will be our committee's top priority going into the new Congress. And our work is not or not. I mean, we have really done, I think, an amazing job educating members on both sides of the aisle what we're talking about. And I'll say that we've also achieved that about the custody issue through preparing those members and staff for a vote. And we've also achieved that in the realm about the pros and cons and

structural issues around stable coins. So this has been a great Congress. And I want to thank every entrepreneur, venture capitalist, innovator, coder, crypto promoter, who's come to the hill and told use cases about how a blockchain operating system can make our country better, stronger, and more effective, and how tokens work. I won't name names because there are a lot of people who've done a lot of good work, and you know who they are, and they've been on your show. But I'm not giving up till the end of this Congress, and if for some reason we don't succeed, by golly, we'll do it right out the gate in the new Congress. Well, getting a market structure bill would be enormous to capital formation,

in this country. So really applaud you for your efforts there. And you brought up stable coins. From where I sit, this is clearly a killer application for public blockchains. From the venture capital perspective, we are seeing so many startups get off the ground, targeting remittance flows, and really also enabling people outside of the United States to hold their savings in US dollars for the first time. So to me, it just seems like an objectively good thing for the US dollar to allow stable coins to proliferate and allow US regulated issuers. to play in this market in a very clear way. How well is this appreciated in lawmaker circles that this is a net benefit to the U.S.? I think growing. I will not say that it's an accepted,

stipulated point of view. Paul Ryan wrote a good op-ed that got some good circulation on this point of view. We've certainly made this the theme in many hearings that we've done in all my visits at the U.S. Treasury and at the Federal Reserve and their top officials and working on stable coins. I think they recognize that. And we're working through a set of issues that concern me, which is that for some, mostly in the Democratic Party, but not exclusively at all, tokenized payments using something like a stable coin, are perceived as more risky less transparent, more used by illicit activity, drug dealers, transnational criminals, terror groups, or state actors like Iran or North Korea.

And so we've got to connect those dots, Matt, that hang on, hang on, the biggest, most abused source of payment in the world by illicit actors is what, a $100 bill, which we export. outside the United States on pallets. I don't remember the number. People can search for it, but I think around 60% of currency of the U.S. is not in the U.S. It's outside the U.S. Some famous number like that. So we can perform a Bank Secrecy Act, any money laundering regime inside a blockchain distribution mechanism quite effectively, but we need to try to find consensus there. And I would say that we do not have consensus on that. And I think that is a, it's been a barrier to stable coin legislation moving forward. So having the ability to fully

surveil and see transactions on a public change, it seems like a better way to catch criminals than physical cash, right? I've often said that physical cash would probably be outlawed if it were invented today. So I guess that education hurdle is still ongoing from the sounds of it. Yeah, and I've worked very hard. I have, for example, in the recent Wall Street Journal reporting right around October 7th on the just grisly surprise attack by Hamas on the nation of Israel, the Wall Street Journal carried an extensive set of stories about how Hezbollah, Hamas, Iranian proxy groups were using blockchain and cryptocurrency to fund their operations. And they cited some numbers in the newspaper that were quite large. I have worked really hard to get all

that declassified to bring a lot more clarity on that to the marketplace. I've had a lot of members go get that classified briefing so at least they know that the way that was described might not be fully accurate from a journalism point of view because of what you say. Trade-based money laundering, cash, hawala, illegal real estate sales, all far exceed any microscopic amount of cryptocurrencies. Now, are illicit organizations experimenting with a greater use of cryptocurrencies? The answer there is yes. But they also are stumbling into exactly what you pointed out, which is, well, you're going to be discovered at some point. And there are a lot more talented people out hunting for illicit transactions on public blockchains.

What's the best way to handle it? In my opinion, pass the Patrick McKinery, Maxine Waters' approach to a stable coin issued in the United States that's fully audited it, that's transparent, that we know what the rules are, that has oversight. And guess what? The world will want to be in the U.S. they'll want to be in the U.S. And these entities, these dollar-backed stable coins that currently don't comply with those rules in order to distribute in the United States, what would they do? They'll fall into compliance.

And if they did that, then these sort of ones that are on the fringes outside the U.S. incorporated in money laundering type jurisdictions, well, they'll just go bye-bye, or their users will be true, like, if you're a criminal, this is where you're, go. And of course, every law enforcement organization on the planet will be monitoring what's going on in that. So you get my point. I agree with you that a tokenized payment in dollars is an extension of the power of the United States and our reserve currency. But when you combine it with our rule of law, our regulatory system, our open court system, our ability to adjudicate complaints, if you're in global business, this is what you want. So I'm optimistic there.

I really thank Patrick McKinney, the chairman of the Financial Services Committee, and Maxine Waters, the ranking member, the Democrat from California. They have worked together. They have collaborated. We've had tremendous engagement and collaboration from the U.S. Treasury officials from the Federal Reserve. And we don't have anything to announce that we're ready to go, that we're going to move it across the House floor. But please know how important I think it is and how I share your view that it is, quote, the killer app. And we think we've crafted an approach for both bank and non-bank issuers under U.S. law to really let this be something that people can embed in their payment transaction systems. And then the future is really going to be interesting once we have that. You said it very well there. I couldn't have said it better myself. It was someone that lives in Massachusetts. We've had the senator up here, Elizabeth Warren, who frankly hasn't passed a lot of legislation

over the years. It's been surprising to me that she has such an outsized voice in the financial services sector. How do you see that playing out over the next couple of years? Yeah. Well, Senator Warren is a powerhouse. She's the junior senator from Massachusetts, but she's been at the heart of the Obama-Biden Financial Services Matrix, meaning consumer protection is how she made her name when she left the Harvard faculty and became an Obama advisor, which led to the Senate. So consumer protection. And then she's the one, I think, who's led the way and cut her teeth on that all crypto users, I don't want to say that. I don't want to put words in her mouth. That many, many uses of cryptocurrency are illicit. And she is a outspoken

proponent that crypto is basically a illicit finance source. How do we counter that? Gosh, education, demonstrate bipartisan leadership like we did in the House where we put up votes. We've never once encouraged non-AML, Manny Money Laundering, or BSA, Bank Secrecy Act, lack of compliance. Just the opposite. All of our bills, all of our discussions, both in FIT 21 and in the Stable Coins legislation, have at their core that everyone involved in the ecosystem has an obligation. to comply with federal law, period.

And we give resources to our national security apparatus, both the intelligence community and beyond, to work with Treasury, to counter outside the U.S. illicit finance activities, whether they are halala, trade-based money laundering, cash, or, of course, crypto. I don't see these things as inconsistent.

But it is true, Senator Warren pretty much has determined and who gets appointed by the Biden administration in any financial job. And she sets the tone, I would say, in financial service. Well, I know you're on a busy schedule, and I want to get you out of here in a minute here, but I'd love to just highlight an issue that is not getting as much attention as it should, and that is the case of Tigran Gambarian. So what is it going to take to bring him home? And I know you've been working hard on this case.

Well, thank you. Very tragically, three weeks ago, I had a chance to be in a boogey. Nigeria, and I went to Buja prison where Tigran is being held. That's the prison where they put Boko Haram terrorists. He's in a room that has two other prisoners with him. He's not in the general population. He has been receiving consular visits from our officials at our embassy in Abuja. But he is suffering. He's depressed. He's had maladies. He's had double pneumonia. He's got malaria. He really questions the medical attention that he's gotten. but our embassy has been pushing very hard to have him released on a humanitarian release.

The congressman for his family, Rich McCormick, Dr. Rich McCormick from Georgia and I have introduced a resolution that we just introduced last week to call for the unconditional release of Tigran. He is being illegally held by the Nigerians because of their own four decisions they've made in economic policy and some of their concerns about Binance. operations in Nigeria. But that is no reason to essentially kidnap an American citizen who is a former IRS agent and someone who is helping, helping Nigeria, close the gaps in illicit finance. So it's a horrible situation. We're outraged by it in the House and Senate. And the same is true in the executive branch. And we're working every day to get him out of that prison and get him

home to Georgia to be with his beautiful family. Well, I appreciate all the work. you're doing there. That story is one that is underreported in the United States. Representative Hill, this has been great, really enjoy the conversation, and where can we send people to learn more about your views, keep up on the issues that you're fighting for on a daily basis? You bet. Well, they can go to hill.house.gov. That's my official website. You can sign up for a newsletter that we have on all of our activities every week. You can read about all the work we're doing in digital assets. And they can also visit for full text of our bills at the Financial Services Committee website. Just you can put in your search engine financial services committee, Republicans,

and you'll get a full list of all of our work in the digital assets subcommittee. But really appreciate the chance to be with you, Matt, and thanks for the invite. Well, thanks so much for the engagement. It was great to see you and enjoy the rest of the week. You bet. Thanks a lot for doing this. Thanks for listening to another episode of On the Brink with Castle Island. find out more about Castle Island, visit castle island.V.C. To listen to all of our podcast episodes, please go to On the Brink-Podcast.com or just click on the tab in our website. Thanks for listening.