The Breakdown - A Crypto Ally as Top US Bank Regulator?

Episode Date: November 20, 2020

Today on the Brief: Markets fight to remain optimistic  Jobless claims rise for the first time in five weeks China borrows at negative rates for the first time  Our main discussion: a crypto ally as top bank regulator?  Brian Brooks was an executive at Coinbase when he was tapped by Treasury Secretary Steve Mnuchin to be the number two at the Office of the Comptroller of the Currency, the nation’s main bank regulator. Within two months he was acting Comptroller and now Brooks has been nominated for a full term.  In his short tenure, he has given banks the OK to provide custody of crypto and banking services to stablecoin issuers. In so doing, he has aroused the ire of congressional Democrats, who have accused him of acting too quickly and unilaterally on crypto.  In this discussion, NLW breaks down Brooks’ time at the OCC and asks whether he’s likely to be confirmed before the next administration early next year. 

More fast-moving regulators and specifically allies could be hugely important as this industry gets bigger, more significant, and consequently more threatening. I don't take it lightly that this group of Democratic senators who were trying to castigate Brooks pointed to the American Bankers Association and other trade groups. If you don't think as crypto gets bigger that that type of group is going to get much, much more bloodthirsty, you have got another thing coming. 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. The breakdown is sponsored by crypto.com and nexo.io and produced and distributed by CoinDest. What's going on, guys? It is Thursday, November 19th, and today we are talking about a piece of news from earlier in the week that has actually gotten buried because there has been so much excitement around. this price action, but we're talking about a crypto ally as the top U.S. bank regulator.

First up, however, let's do the brief. First up on the brief today, markets trying to stay optimistic. So what happened? For the past few weeks, there has been a wave of vaccine optimism that has been buoying markets. Pfizer and Moderna both claimed higher than 90% prevention rates with their vaccine trials. At the same time, however, COVID has continued to tear through the U.S., bringing with it a new wave of lockdowns. New York City has closed schools. The Midwest, in particular, is really hard hit. Kentucky, Minnesota, Wisconsin, Illinois have all adopted new lockdown measures. Many states and jurisdictions are encouraging restrictions on gatherings for Thanksgiving. And of course, Thanksgiving is potentially

the Tinderbox when it comes to accelerating another wave of infections. Basically, what's happened in that in the last few days, stocks have been choppy, and really what the markets are trying to figure out is the balance of optimism around vaccines for the long term with the continued short-term reality. One market strategist at JP Asset Management put it like this. Markets are grappling to price in two very different pieces of news across two very different time frames. The vaccine news is categorically positive, but it will play out over several months and several quarters. Investors are trying to balance that against the short-term news of rising cases and a deteriorating economic outlook. Next up on the brief today, jobless claims rise

for the first time in five weeks. Initial jobless claims rose by 31,000 to 742,000 this week, and these numbers are really confusing, if important to understand, for a few reasons. First, because this crisis has now been going on for so long, some of the information reflects that people no longer qualify for certain programs more than any actual recovery. Continuing claims, for example, is down from $6.8 million to $6.4 million, which is good, right? In fact, the number of people collecting benefits now has finally fallen below 2009's peak levels. However, about 4.4 million people were collecting money through a federal program that provides an extra 13 weeks of benefits after those primary state programs have run out. That 4.4 million number is up from 4.1 million, so a big

portion of those continuing claims decreases are actually showing up on these federal programs. The bigger issue, of course, however, now is that these are lagging indicators on the progress of the virus, as in these numbers mean a lot in a world where what we're asking, is how fast the recovery is happening. They mean little in a world where we're heading back into another round of forced closures that could knock more people out of their jobs. Finally on the brief today, China borrowing at negative rates for the first time ever. Another milestone in the wacky world of negative yielding debt, China has sold its first negative yielding debt, raising $4.7 billion in a deal in euros that was split between 5, 10,

year bonds, with the five-year bonds having a negative yield. As I mentioned, this is the first time China has sold negative yielding debt, and Samuel Fisher, who is the head of China-onsore debt capital markets at Deutsche Bank said, people want more exposure to China. China's financial markets are opening, but there is still broad scarcity of the sovereign debt among investors. The story of China's COVID turnaround and the resilience of its economy are also things people like. I think these things are true. It's also worth keeping in mind that Samuel Fisher's Deutsche Bank was involved in the transaction. Others pin this as actually part of a push for China to be less reliant on the U.S. and U.S. dollar markets. And to me, there are actually three stories happening

here. The first is exactly that, China trying to move away from the U.S. by expanding its debt deals with places like Europe. Second is the mega trend of negative yielding debt. The world has reached a new all-time high with more than $17 trillion in negative yielding debt. This is something that is simply a part of the modern financial landscape. But third, there's also a changing attitude around debt, and this was summed up in a WSJ piece. Andrew Mulliner, a bond portfolio manager at Janice Henderson, said most country's debt to GDP ratios had increased substantially, so it was important to focus on a country's ability to control and pay off the debt. What's become increasingly apparent is that these high debt loads aren't necessarily a problem if you've got a captive central bank,

he said. That notion that high debt loads aren't necessarily a problem if you've got a captive central bank is going to be at the center of the most radical financial experiments we have in the next 10 years. This episode is brought to you by crypto.com, the crypto super app that lets you buy, earn, and spend crypto all in one place and earn up to 8.5% per year on your Bitcoin. Download the Crypto.com app now to see the interest rates you could be earning on BTC and more than 20 other coins. Once in the app, you can apply for the Crypto.com metal card, which pays you up to 8% cashback instantly on all purchases. Reserve yours in the Crypto.com app today. Many investors want to be a part of the next bull run.

Others seek to build their dream home, finally launch that startup or fund their education. Try Nexos instant crypto credit lines and borrow against any major cryptocurrency, with no minimum or maximum, withdrawal amounts, no fees whatsoever, no credit checks, and flexible repayment. Not to mention, the APR starts at just 5.9%. Stay on top of your investment game with nexo.io. And remember, it's your crypto, your credit, your choice. Get started at nexo.io. Let's shift over to our main discussion, a crypto ally as top U.S. bank regulator. First, let's do some background. In September of 2018, Coinbase hired a serious hitter from outside the world of crypto to be its chief legal officer. Brian Brooks was a former Fannie Mae Executive Vice President, General Counsel, and Corporate Secretary, and in March of this year, just as the seams of the markets were absolutely ripping open around COVID-19, U.S. Treasury Secretary Stephen Mnuchin designated Brooks to be second in command at the U.S. Office of the Comptroller of the Currency.

At the time, then comptroller Joseph Odding said, quote, he is a visionary thinker with a passion for service and a deep understanding of how the financial services industry supports our nation's prosperity. We are fortunate to attract such an experienced and talented individual to join our federal agency. For those of you who are unfamiliar with it, the office of the comptroller of the currency is the regulatory agency that charters national banks. It's basically the bank sector regulator.

Now wildly, less than two months into this gig, Brooks got. a promotion as Otting stepped down at the end of May. And before we move on, just quickly, an interesting connection between the three men. One West Bank was founded and owned by Steve Mnuchin. Odding was president and CEO of One West between 2010 and 2015. Brooks was vice chairman of One West between 2011 and 2014. So there are obviously many ways to look at this. One is to raise perhaps some serious questions of supporting your own and keeping things inside a very small collective of people. The flip side is that all of these people know each other and are familiar with each other's quality of work. Either way, that's not really the point here. So almost as soon as

he got in, Brooks started moving and pushing the envelope specifically around crypto issues. At consensus distributed earlier this year, he articulated the support for treating crypto firms and fintech firms on a national regulatory level rather than on sort of a state-by-state level. He said, crypto is one of those areas where we have to ask ourselves, does it make more sense to think of crypto projects as local projects or global projects? If they're global, then the rationale for a single national license makes more sense. Increasingly, it looks a lot like crypto is banking for the 21st century. He also hinted at something that would become an even bigger theme very soon. As crypto matures, there are increasingly many companies that have perfectly robust risk

management systems and do have an ability to comply with those laws, and they shouldn't have trouble finding bank relationships. Again, one of my messages in my new role is going to be to remind my colleagues at the OCC that banks not only have the ability, they have an obligation to serve all lawful businesses. They shouldn't be discriminating because something's a new technology. Perhaps unsurprisingly, then, this was followed up in a publicly dated letter in July. the OCC announced that any national bank could provide custody services for cryptocurrencies. The letter said, quote, the OCC recognizes that as the financial markets become increasingly technological, there will be an increasing need for banks and other service providers to leverage new technology

in innovative ways to provide traditional services on behalf of customers. This is an actually big deal. Banking relationships have historically been a huge stumbling block for this industry. Keep in mind the example of something like India, where India's central bank wanted to kill crypto, and what they did was they stopped banks from servicing crypto companies. It stunted the industry for two full years until it was overturned by the Indian Supreme Court. In September, the OCC expanded this, officially saying that national banks could provide services to stablecoin issuers in the U.S.

Quote, national banks and federal savings associations currently engage in stablecoin-related activities involving billions of dollars each day. This opinion provides greater regulatory certainty for banks within the federal banking system to provide those client services in a safe and sound manner. The common thread on all of these moves to me is basically something like, if you're doing things legitimately inside the system, we shouldn't be stopping you because you look new. And as I mentioned, I do believe that these moves have been more than symbolic. In my conversation with Robbie Gutman from Nideg last week, he said explicitly that this decision, particularly around banks being able to provide custody for crypto had made a huge difference in terms of the

institutional investors that felt they could now engage safely with the space. Interestingly, Brooks' quick movements have not been unilaterally loved. A week or so ago, a group of six members of Congress wrote a strongly worded letter castigating Brooks for first, acting unilaterally with regard to crypto regulations, and second, prioritizing these activities while in a pandemic. quote, arguably the immediate needs of millions of at-risk individuals who do not yet receive an economic stimulus check and or cannot deposit their funds in a bank deserve greater attention than an effort to increase access to financial services to the banked community via mobile phones. Our concern regarding the OCC's excessive focus on crypto assets and crypto-related financial

services is shared by the American Bankers Association and other trade groups who have expressed similar reservations that such services move too far away from the core business of banking. For me, I mean, in terms of acting unilaterally, it's sort of like fine. There are separations of powers and checks and balances for a reason, and one set of regulators getting mad at another and trying to reclaim power from them is part of what makes the system work in terms of not veering wildly from one extreme to another, messy as though it may seem if you look at it too closely. The prioritization focus, however, seems a little bit more ridiculous and certainly a lot more political.

A lot of the letter feels like a little bit of political. point scoring, which in this environment you simply have to expect. Anyway, in spite of that, or maybe who knows, because of all that, Brooks was just formally nominated for a full five-year term by President Trump. Even with that, even with the possibility that could be very good for the crypto industry, there are a lot of barriers. First, another of Trump's recent financial nominees has failed, Judy Shelton for Fed. She got hammered around questions about the gold standard and her opinion about Fed independence. Second is a timing issue.

We are currently in a lame duck congressional session. The banking committee would have to schedule a hearing and hold a vote, and we're about to be on Thanksgiving break. So there could be serious issues just getting this thing done before next year. Finally, there's a question of perception. Coin desk featured a quote from a Washington analyst who wished to remain anonymous who called this a last-minute move to install someone at the OCC for five years, which the Democrats are likely to view as a shady trick.

This is a shame that this appointment in particular is getting caught up in that sort of political environment. More fast-moving regulators and specifically allies could be hugely important as this industry gets bigger, more significant, and consequently more threatening. I don't take it lightly that this group of Democratic senators who were trying to castigate Brooks pointed to the American Bankers Association and other trade groups. If you don't think as crypto gets bigger that that type of group is going to get much, much more bloodthirsty, you have got another thing coming. Will Brooks be confirmed? I don't know, but I hope so.

Let's keep an eye and see what happens. For now, I appreciate you listening, and until tomorrow, be safe and take care of each other. Peace.