The Breakdown - 71 Democrats Break Ranks to Vote for Commonsense Crypto Regulation

Episode Date: May 23, 2024

The FIT21 Act vote happened yesterday and a much-higher-than-expected number of Democrats supported it. NLW explains what happened and what comes next. Today's Show Brought To You By Ledger - 5% to Bitcoin Developers When You Buy https://shop.ledger.com/pages/bitcoin-hardware-wallet Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Thursday, May 23rd, and today we are, of course, talking about the Fit 21 vote. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link at the show notes or go to bit.ly slash breakdown pod. Well, friends, we are continuing in this incredibly consequential week in D.C. Yesterday was the House vote on the financial innovation and technology for the 21st Century

Act, better known as Fit 21. The vote was a landslide in favor of the bill, with 279-4 and 136 against, a two-thirds majority. 71 Democrats joined with almost every Republican to pass the bill, a huge increase from the 21 House Democrats who voted to repeal SAB-121 earlier this month. This has some big implications for the Democrats shift away from being the anti-crypto party. It also says a whole lot about the waning power of Elizabeth Warren and Gary Gensler over crypto policy. As a refresher, Fit21 is the first crypto regulatory framework to make it to a vote in Congress.

In really broad strokes, it sets out the circumstances where crypto tokens should be considered commodities rather than securities. This is largely about proving that an underlying crypto network is sufficiently decentralized. The bill also divides up the roles of the SEC and the CFTC, with a big change being the CFTC being assigned to regulate spot crypto markets. Finally, it puts in place some basic consumer protections around transparency and disclosures for token promoters. The general sense within the industry is that the bill is a good first step, but needs refinement. More on that later in the show, but for now, let's get on with what happened during this momentous day in Congress. The morning began with the administration weighing in on the bill.

SEC Chair Gary Gensler was unsurprisingly opposed. He released a sprawling statement that warned of new loopholes and a risk of undermining financial regulation overall. Stop me if you've heard this all before. Suffice it to say that Gary thinks that crypto is already adequately regulated under existing securities regulations, despite his agency's dismal track record of proving that in court. More interesting was a statement from the White House. Two weeks ago, ahead of the vote to repeal SAB-121, the White House had come out as aggressively opposed and threatened to veto the bill. This statement was still in opposition, but much softer in tone. It read,

The administration opposes passage of the bill, which would affect the regulatory structure for digital assets in the United States. The administration is eager to work with Congress to ensure a comprehensive and balanced regulatory framework for digital assets, building on existing authorities, which will help promote the responsible development of digital assets and payment innovation, and help reinforce United States leadership in the global financial system. The statement summarized that the bill lacks sufficient protections for consumers and investors in its current form. Basically, the statement read, like the administration now presenting itself as willing to work on this legislation, but needing some additional time. Hardly a ringing endorsement of

crypto, but for an administration that has spent the last two years attacking this industry, it is a massive change. Alexander Greve, the head of government affairs for paradigm, called it a huge course correction compared to the SAB 121 statement. Twangwai Li, the General Council at Anchorage Digital, tweeted, the White House's statement this morning recognized the need for comprehensive crypto legislation to promote innovation and reinforce U.S. leadership. And its expressed eagerness to work with Congress to get it done is remarkable and encouraging. Glad to see us finally moving past this notion that no new laws are needed. We have wasted precious time. Now let's show the world we can build a safe functioning and thriving crypto market in the U.S. I think it's even more than that. The central logic that the Warren-led

part of the Democrat Party has been trying to push for the last year and a half or so when it comes to crypto is that there shouldn't be any new regulations because that would legitimize it. It wasn't just that they were saying what Gensler has been saying, which is that the regulations that exist are sufficient, but that they explicitly don't want to recognize it and give it the veneer of respectability. That makes the White House's statement that they want to work on comprehensive legislation, a total departure from the message that Warren and her allies have been pushing for the last 18 months. Moving through the day, the debates on the House floor crystallized the strongly held positions among lawmakers. Patrick McHenry, the lead Republican sponsor of the bill,

explained just how untenable the state of U.S. crypto regulation had become. He said, unfortunately, our current regulatory framework is preventing digital assets innovation from reaching its full potential. The SEC and the CFTC are currently in a food fight for control of these asset classes. They've created an impossible situation where the same firms are subject to competing and contradictory enforcement actions from the two agencies. Fit21 fixes this by creating a regulatory framework by providing clear rules of the road and strong guardrails for Americans engaging with the digital asset ecosystem. Moving to the Democrat side of the aisle, committee leader Maxine Waters heavily referenced objections raised by Gensler. Her main issue seems to be a lack of confidence

that the CFTC could adequately regulate a retail-focused market. She said, We are the envy of the world because of the SEC. They are the experts. Waters tapped in on the fear that this bill would somehow usher in a financial crisis, closing by stating, This bill is perhaps the worst, most harmful proposal I've seen in a long time. The bill would deregulate crypto and certain traditional securities to the extent that I and other experts have expressed serious concerns about this bill causing a potential market crash and recession. If you will allow me to don't my editorialization cap for just a minute, something that I don't

often take the prerogative to do, are you kidding me? The number of times that opponents of this bill have said this, without explaining at all, by what mechanism they think it could cause a market crash, just means their opinions are basically to be taken seriously about nothing. It was far from just waters, though. Anti-Crypto-democrats spoke for over an hour against the bill. Classic antagonist Brad Sherman had some of his most confusing takes to date. He seemed to be claiming that regulating crypto would undermine sanctions, reduce the power to tax and collapse U.S. dollar dominance. Sherman said on the House floor that the U.S. has irresponsible fiscal policies that would make Argentina blush, and that if crypto became widely

adopted, that would no longer be possible. So, I don't know, you try to figure that out and then come tell me what the hell he was trying to say. So far as there was a point, being made by the anti-crypto Democrats, it was that Fit 21 would open a loophole to deregulate traditional stocks and bonds through tokenization. Basically that somehow, if an asset was transacted on a blockchain, existing securities law would cease to exist. Ultimately, though, this wasn't just a referendum on crypto. It was about common sense. Democrat Wiley Nicol made the case for his colleagues to vote for the bill arguing that crypto isn't going anywhere. That quote, whether you love crypto or you hate it, you should support regulation because the status quo

just isn't working. Support for U.S. leadership and digital assets shouldn't be a partisan. an issue. Hello, breakers. Today's episode is sponsored by Ledger. As another cycle ramps up, it's another chance to think about your Bitcoin custody best practices, and of course, to help all the new folks do the same. Ledger is the global platform for securing Bitcoin and other crypto. Ledger combines both hardware wallets and the Ledger Live app to offer the best way to buy,

sell, swap, and stake without sacrificing on security or self-custody. Ledger features cutting-edge technology in the form of a certified secure chip and a proprietary operating system, but also brings ease of use. This makes Ledger a safe and secure way to manage your digital assets without all the stress. Check out the link to the Bitcoin Ledger Nano in the show notes. 5% of all sales of the Bitcoin Ledger Nano go to support Bitcoin development. Thanks once again to Ledger for supporting the breakdown. As the votes piled up, it became clear that the Bidgines. bill would pass with strong bipartisan support. 71 Democrats voted for the bill, an increase of 50 from

the SAB-121 vote. The clear standouts were Democrat powerbroker Nancy Pelosi and House Democratic caucus leaders Pete Aguilar and Ted Liu. Following the vote, Pelosi said, Fit21 is a first step to establish a regulatory framework for digital assets, and it must be improved by working with the Senate and the administration. While building a foundation for responsible innovation, we must take further action to strengthen guardrails for consumers, investors, and taxpayers. Shortly after the vote, House staffer Michael Cameron ran the numbers and found that this wasn't just vulnerable Dems siding with crypto to boost their chances in the election. He found, in fact, that the average Democrat who voted for the bill was leading in the polls by more

than 12 points. While key Democrat leaders defying the White House to vote for the bill is important, the sheer numbers were the most staggering part. Heading into the vote, 40 Dems in support seemed like the most optimistic estimate going around, so this result exceeded all expectations. Jake Trevinsky, the chief legal officer at Variant Fund, tweeted, that is a huge number of elected Democrats voting no confidence in the current SEC and sending a message to the Biden White House that anti-Crypto is a losing platform this year. Justin Slaughter, the policy director at Paradigm noted how unusual it was to see a complete bifurcation of a party on a major issue.

Commenting, impressive, especially given the strong statement of total opposition from SEC Chair Gensler this morning. In most countries, a minister who so ferociously opposed legislation publicly and privately lobbied against it, but still lost a third of his party, would step down from his post. So, with Fit21 passed in the House, what happens next? The bill has a difficult and unusual journey to get to a vote. Usually, if legislation is intended to be passed, there will be an accompanying bill being worked on at the same time in the Senate.

This allows the Senate to revise the bill through the committee process and ensure that senators are prepared for a vote once it has been passed in the House. None of that has happened in this case, with reports suggesting that the Senate has barely started considering this legislation. Most analysts seem to think this bill could take weeks, months, or even years to get through the Senate if it's even considered at all. The Senate isn't required to take on this bill just because it was passed in the House. They could even decide to work on an entirely separate form of crypto regulation, with, for example, the Lummus Gillibrand bill being a possible alternative.

Another potential outcome is that the bill gets fast-tracked and attached to must-pass regulation later in the year. This would require either strong existing support in the Senate or aggressive political horse trading to bring in enough Democratic senators. At the moment, there's no indication that this is likely, but it is worth keeping in mind that it's possible. And of course, the pathway to that outcome is probably through crypto showing up even more strongly as an issue in the polls. Ian Katz an analyst with Capital Alpha partners said, the Senate doesn't typically take House bills and just vote on them. So while the Senate might eventually be interested in considering some kind of crypto legislation, it almost certainly won't be this one. Despite the uncertainty around the future of this bill,

the vote was widely celebrated. The lack of a credible pathway to becoming law might have even been a feature rather than a bug. It allowed this vote to function more as a referendum on whether U.S. crypto policy needed changing, or if the status quo of perpetual investor harm and regulation by enforcement is acceptable. Yesterday, the House gave a resounding answer to that question, and the paradigm shift the vote will usher in can't be overstated. Over the past week, crypto has gone from a fringe political issue to a priority for everyone in Washington. For the first time, a majority of lawmakers have accepted the argument that crypto needs its own rules and should be allowed to thrive. Tweeted Avichal Garg of Electric Capital, this is a huge

breakthrough. The number one thing I have learned after grinding on this for three and a half years is that progress in politics and legislation is imperfect and happens in spurts. When you can get some of what you want turned into actual law, you take it. Fit 21 is not perfect, but it gets us one step closer. Not only do we win to fight another day, we put points up on the board. We demonstrate to the entire world that we know how to get things done, and we may not get another opening for years. Today's vote is performative, but power is 80% performative.

But who is performing? For whom? What does their performance tell us? The performance tells you where the world is heading. This vote tells us, Republicans own this issue from the get-go. Dems are worried about losing votes, money, and losing the issue to Republicans, Dems are breaking away from Elizabeth Warren, the president is breaking away from Warren,

power centers are shifting, and crypto is winning. Somewhat lost in the celebration was one of the key points. Is this bill actually what we want? Many people who fought hard to get the bill passed acknowledge that it isn't perfect. However, as the industry closed ranks to push this agenda in Washington, some have thought there hasn't been enough critical analysis. Crypto lawyer Gabriel Shapiro was the most outspoken critic this week, writing several long threads on the topic that came down to two big points.

First, the bill hands a huge amount of regulatory power to the CFTC, which has some significant risks attached. As he put it, there has never before been a spot commodities market that is regulated. We're just handing this authority over wholesale to the CFTC and hoping they are not insane fascists like Gary, but he used to be the head of the CFTC. Shapiro's second point is that the bill doesn't provide the necessary protections to allow complex defy markets to evolve. There's some minor carve-outs that would allow basic dexes to operate, but the bill would still allow leveraged and derivatives platforms to be shut down by regulators. If crypto is going to become the rails of the global financial system, then it seems obvious that

more complex markets will need to be fostered rather than destroyed. There are also concerns that the bill would create a regulatory moat for incumbents, a provision that limits retail investors to allocating only 10% of their net worth to crypto, and more. All of that's good. I'm glad people are talking about it. I'll continue to report on what they have to say, but it is so far from the point of this week. This vote is the culmination of the radical shift that we have seen over the last two weeks. Crypto has become a political issue that is undeniable. It has become a losing political issue for Democrat in a way that we always assume that it would. Is there more work to be done? Absolutely. Is there more work to be done specifically on this bill if this was to go to a Senate vote? Absolutely.

But does this vote mark the single biggest moment in crypto political history? Also, absolutely. We will, of course, continue to follow this story as it evolves. But this Memorial Day weekend, you are celebrating a victory. Big shout out to my sponsor for today's show. Check out the ledger Bitcoin Orange Nano, 5% of sales will go to support Bitcoin development. Until next time, be safe and take care of each other. Peace.