The Breakdown - A Combative, Contentious Hearing Moves Stablecoin Legislation Forward

Episode Date: July 28, 2023

Crypto's big policy week continued with the House Financial Services Committee advancing stablecoin legislation after a torturous 12-hour markup session. Today's Episode Sponsored By: In Wolf's Clothing -- The first startup accelerator exclusively for Bitcoin and Lightning startups -- Applications for Cohort 3 open NOW -- https://wolfnyc.com/apply ** Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto 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 Friday, July 28th, and today we are talking about a wild dragout, stable coin fight in Congress. Before we get into that, however, if you are enjoying the breakdown, maybe you want to be a part of it? A couple different things that I am looking for currently for part of the breakdown network. One is I am continuing to look for folks who want to get into sales. This is something that I'm super deeply personally involved in, and I'm looking for someone to join the team,

and you don't necessarily have to have a lot of sales experience. All that's required is hustle and good communication and the desire to really go build something great. Second role I am looking for is actually specific to the AI show. I am looking for an overnight researcher, so probably someone who is in the APAC region or Australia. So if either of these sound like you or, or if you have more questions, send a note to Jobs at Breakdown.network.

And the one other super quick thing. Today's breakdown is once again brought to you by In Wolf's Clothing, the first startup accelerator for Bitcoin and Lightning companies. This is a program that's in New York City comes with mentorship, funding, access to other great companies. If you are out there trying to build the future of Bitcoin and Lightning or trying to bring Bitcoin and Lightning to other industries, this is a program you need to seriously consider and check out.

Go to Wolf-NyC.com to learn more about the program, and if it seems like it might be a fit, they are accepting applications right now for their third cohort, but the deadline is coming up soon, August 4th. Again, check it out at Wolf-NyC.com, and thanks to those guys for sponsoring the breakdown. But with that, let's get into the show. We obviously just came off a very historic day in Congress with the advancement of the Fit Act, and that was filed by another day focused on the same issues in Congress that was a little bit more contentious. Before we get into all the wildness around stablecoin legislation, let's actually stick with the FID Act for just a moment.

Following the Crypto Market Structure Bill, the Financial Innovation Technology for the 21st Century Act being marked up and approved by the House Financial Services Committee on Wednesday, the House Agriculture Committee also passed that same act on Thursday. Now, the approval of both committees was required here due to the bill dealing with the jurisdiction of both the CFTC, which is overseen by House Ag, and the SEC, which is overseen by the House Financial Services Committee. In the Ag Committee, Democrats raised familiar concerns with the bill,

primarily around insufficient CFTC funding, as well as the need for stronger consumer protections. But the complaints were ultimately narrow, and Democrats joined Republicans to approve the bill with bipartisan support. Bill sponsored Dusty Johnson said in a release, The digital asset space needs a legislative solution to the regulatory hangups. This is the right legislation for the job, and I am glad both committees moved quickly to our framework to the House floor so that digital asset markets can thrive. The fit for the 21st Century Act provides the clarity the digital asset industry has been asking for and ensures the U.S. is leading when it comes to crypto. I'm proud of the bipartisan support the bill

received by the committee today. Now within crypto, industry figures celebrated the passage of the bill, which can now make its way to the House floor for a full vote. Blockchain Association Executive Director Kristen Smith said in a press release, today is a landmark moment for our industry. Thank you to Chairman McHenry and Chairman Thompson for their leadership on this critical issue and willingness to work with and accept feedback from industry and our members. While not yet perfect, we applaud this historic bill and look forward to our continued work with both committees to ensure the United States remains the world leader in digital asset innovation. CryptoCounty for Innovation CEO Sheila Warren said in a statement, it's a significant marker that shows

keeping the status quo is not an option. There is too much at risk for consumers, U.S. competitiveness, and national security to take a back seat. Now, compared to Wednesday's day-long markup session, this House Ag Committee was relatively uncontroversial and speedy, wrapping up in just a few hours. At the conclusion of the session, Chairman Glenn Thompson quipped about the stable coin hearing that was taking place down the hallway, asking, did we do better than financial services? Little did he know just how much better his committee had indeed done. Block reporter Colin Wilhelm said,

House Financial Services Committee Chair McHenry jokingly remarked about the different dynamic at Ag today from the Dias right before recessing his own committee about an hour ago. He said, I don't seek to emulate the Ag Committee in many ways, but man oh man, was that sweet. But then again, what would America be without some fireworks? Elsewhere, in the Capitol Building, the House Financial Services Committee was holding their own markup session, this time for the clarity for payment Stable Coins Act. Now, this Stablecoin bill has had an absolutely torturous path. It began as a bipartisan bill being negotiated between parties behind closed doors in the middle of last year, and, as last year's election approached, it appeared that a consensus was emerging, and that the bill

might have a chance to move forward to begin the committee process. These hopes, however, were dashed at the last minute, with rumors swirling that the Treasury had intervened to derail the bill. After Republicans assumed control of the House at the beginning of this year, the bill was introduced in a public draft was circulated for the first time. This time around, however, the bill lacked any Democrat sponsors. Through multiple committee hearings, Democrats made it clear that they resented the Republican approach of moving forward with the bill, rather than continuing back to the bill. from negotiations. Now, over the past month, Financial Services Committee Chairman Patrick McHenry made it clear that he planned to present the bill for a vote. He had delayed yesterday's hearing multiple

times already since it was first scheduled. For example, most recently, the bill was removed from Wednesday's agenda on short notice with the explicit aim of allowing for last-minute negotiations between parties. With that context, McHenry presented the situation as he saw it in his opening, stating that, today I had hoped to announce an agreement with the ranking member on Stablecoin legislation, referring here to the committee's Democrat leader Maxine Waters. McHenry continued, this will not be the case. To be clear, this was by no means the fault of the ranking member or her staff. They negotiated in good faith over the last 15 months. Instead, McHenry explained that a third party had intervened in relatively constructive negotiations that were reaching their conclusion,

and that, quote, it was the White House's unwillingness to compromise that has once again brought that negotiation to a halt. McHenry said he was disappointed by this breakdown in negotiations, but did not elaborate on why the White House had objected to the bill. Now, the keyest sticking point which has been expressed by committee Democrats throughout the entire process was federal oversight of stablecoin issuers. The bill, as written, provides for state licensing of stable coin issuers with more distance final oversight from the Federal Reserve. This, however, has been viewed as too much of a risk to financial stability for Democrat

leadership. On top of that, a more niche disagreement surrounded the privacy of self-hosted wallets. Some Democrat members have expressed the desire for some form of KYC to be forced upon individuals choosing to hold their own coins. In any case, with McHenry's introduction out of the way, the political games began. Rather than present her introduction, Maxine Waters immediately called for a formal roll call to ensure that there were enough members present. McHenry muttered giddy up under his breath, indicating he knew exactly what he was in for. Democrat members then staged a walkout, exiting the chamber in an attempt to derail proceedings. Republicans were able to track down enough

additional members in the surrounding hallway to continue the hearing. I will pause here just to note, can you imagine any other job in the world, where half the staff could just get up and leave if they didn't want to deal with the issue at hand? Anyway, Waters then proceeded with her opening explaining that, quote, the chair is impatient and is decided to abruptly end our negotiations and move forward with the bill that is deeply problematic. Her core issue with the bill was that it, quote, promotes a race to the bottom by allowing state regulators to offer rival stable coin frameworks without enough federal oversight. She also claimed that reserve holdings were not sufficiently restricted to high-quality assets. Finally, there was a concern that corporations could issue their

own stable coins, allowing big tech firms to mint their own digital money. As the bill was placed before the committee, Waters presented a series of objections and formal votes on procedure designed to obstruct the hearing. Once the dust had settled, the markup session continued without any of the typical shortcuts. For example, rather than dealing with the bill quickly by only discussing potential amendments, clerks were made to begin painstakingly reading the 42-page bill aloud line by line. This style of markup is almost never done and appeared entirely unfamiliar to everyone present, including the clerks. After half an hour of moving through the first section at an agonizingly slow pace, Democrat Stephen Lynch got to the point, heatedly complaining that, quote,

we were informed this meeting that we would have to amend on the fly, section by section. We weren't told that this was a final version. We've had no meaningful opportunity to amend this bill and now we're being asked to do it on the fly. His outburst had come after a Democrat amendment was refused due to a quirk of procedure. Lynch went on. We were being denied a meaningful opportunity to be heard. We don't expect to win our amendments we're going to be outvoted. But we want to be heard and we want to have input on this. Lynch suggested that the bill should be pushed off until September to allow more time

for Democrats to prepare. A comic Henry instructed the committee to, quote, lower the decibels, noting that the bill had already seen significant delays. The marathon, 12-hour hearing continued well into the night at a crawling pace. At one stage, members began taking the opportunity to present lengthy speeches expressing their views on the bill or on crypto in general. Bill Foster once again argued that self-hosted wallets need some kind of identification method so anonymous transactions are impossible. He'd mok the examples of terrorist financing in the drug trade to ram home his point, stating,

I am sure that future victims of North Korea nuclear terror truly appreciate the consideration of my Republican colleagues. Finally, at around 10 p.m., the hearing came to a vote. Five Democrats ended up supporting the bill. The group of, once again, younger representatives had significant overlap with those that supported the market structure bill on Wednesday. That was compared to six who defected to support the Fit Act. So, with one of the most agonizing and obstructionist committee markups in recent memory out of the way, the bill passed by a vote of 34 to 16 and can now proceed to a full vote in the House. So there are a few things to note about this.

First was just the contentiousness of this. Brendan Peterson from Punch Bowl News said, Surreal to watch several months of delicate gradual goodwill between McHenry and Waters evaporate in just a couple hours. And later tweeted, Waters can be heard telling McHenry, you have the power to do what's fair. She's asking for more time for negotiations. Growing crowd of Democratic lawmakers are working McHenry behind the dais. And as far as I can tell, he is not playing ball. Why can't we work on it in August? Waters asks again. McKenry tells Waters he's going to move ahead because he has the votes to, and Waters did not like

that one bit. For what it's worth, I have never seen a committee meeting break down like this. Now, as much detail as I just went into, I really have barely scratched the surface of all the procedural crap that was part of this. Zach Wong, a former policy analyst at Circle, gave a few more thoughts about how to contextualize this. He wrote, short interlude, is all this procedural stuff dumb? No, this is superficially for show, but under the surface, it's a way for the parties to communicate and is deeply important. McHenry scheduling this vote and steadfastly moving forward with committee procedure is saying

to Democrats, this is happening. I have the votes. I am the chairman, you had your chance and I delayed many times for you, but it's the end of the line with negotiations and it's your fault. I bet this message is mostly intended for the White House. Waters is equally as important. Waters is expressing her frustration to McHenry. She's saying, we are close to a deal, you just need to give us more time. If you're going to insist on moving forward, then you are the one blowing this up and we're going to make it a pain for you. She's also defending her members. If she reaches a deal with McHenry and the White House, she will bring her members along with her. And the final committee vote will be an incredible

bipartisan win for everyone, but especially McHenry, probably 48 to 2 or something close to that. To get there, she has to placate other D's, some of whom are very opposed. If McHenry blows this up in D's view, D's have to know that she has got their back on this. That's part of why she's fighting so much. She doesn't enjoy roll call votes any more than anyone else. Now, again, you'll remember that Patrick McHenry blamed everything on the White House. So what is the White House's issue? Well, we don't know for sure there's definitely been a lot of speculation. Brown-Rudnik partner Preston Byrne wrote, I'm reliably informed that the Dems aren't willing to agree to provisions that would prevent the

government from interfering with self-custody and transacting for the purposes of lawful commerce. They want the power to censor digital cash. This is consistent with the Biden administration's approach towards the banking system, which is that it is a political weapon. A rule which would have required the top 30 banks in the U.S. not to discriminate politically was revoked as soon as they assumed power. Preston concludes his long thread, TLDR, I don't think the Congress D's understand how this stuff actually works, and if they did, they'd probably be more enthused about it. Instead, they see crypto as it was in 2013, coded libertarian and therefore bad, and are refusing to adopt sensible rules to regularize it. Nick Carter quote tweeted Preston's thread,

and commented yet again on the problems of politicizing banking. He writes, this leads me to wonder, do the Democrats think they're going to govern for a thousand years? Or do they think the Republicans will nobly refuse to use these same tools when they gain power? It's objectively unjust to politicize access to banking, given that banks are a public-private partnership and exist at the behest of the state. It would be like politicizing water or electricity or social security checks. You just don't do it. Now that it is clearly established as a standard exercise of power, do the Dems think that a future president dissantis or whoever will cast the ring into Mount Doom instead of wearing it himself? Do they think that when the shoe is on the other foot,

their opponents will become noble and principled? Columbia Business School professor Austin Campbell quote tweeted Preston as well and said, The irony is that this stance is near 100% assurance that they are going to lose power over the space entirely. Other countries are quite tired of the U.S. meddling in their transactions. Eurodollar stablecoins will become the global standard and the U.S. will be excluded. So at the end of a long week in Congress, what do we have? Where are we? Well, two groundbreaking crypto bills dealing with market structure and stablecoin regulation are now out of committee and ready to be voted on in the House.

This is the first time that dedicated crypto legislation will be voted on in Congress. Now, there doesn't seem to be any commentator that thinks either bill has a snowball's chance in hell of being passed in the Democrat-controlled Senate to become law, but for some, that's besides the point. What was demonstrated this week was that, one, crypto legislation needs to be taken seriously, that, two, the need to regulate the industry has a reasonable amount of bipartisan support, and three, that the status quo of haphazard regulation by enforcement is untenable if the U.S. wants to retain a meaningful onshore crypto industry. Put simply, yesterday five young Democrats voted in

favor of the stable coin bill against the ranking member of the committee and potentially in defiance of the White House's position. That's almost a quarter of the Dems on the committee. This issue has now become politically unignorable. Anyways, guys, that is going to do it for today's episode. What a crazy week. I want to say thanks one more time to our sponsors in Wolf's clothing. Wolf is the first startup accelerator dedicated to Bitcoin and Lightning, and they are accepting applications for their next cohort. Go check it out at WolfNYC.com. I hope you are headed to a wonderful weekend. Until tomorrow, be safe and take care of each other.

Peace.