The Breakdown - A Historic Day for Crypto Policy

Episode Date: July 28, 2023

It was the first time that standalone Crypto legislation has made it out of the committee process. NLW covers the House Financial Services Committee markdown for the crypto market structure bill, including some tense moments and the defection of 6 (young) Democrats to vote to advance the legislation. 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 Thursday, July 27th, and today we are talking about the big, big day that crypto had in the halls of Congress yesterday. 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' Discrase. You can find a link in the show notes or go to bit.ly slash breakdown pod. Well, friends, like I said, it was a big one. The blockchain associations Jake Trevinsky called yesterday a quote historic day for crypto policy.

And we're going to learn all about why. But first, I wanted to do just an ever so quick follow up to yesterday's show about rate hikes. So to sum up where we left off, everyone was anticipating a 25 basis point hike. It seemed almost assured. And really because of that, people had started to focus not so much. on what the FOMC was going to say next, but what forward-looking economic data might tell us about when a more significant change, a real pivot back to cutting, might occur. Well, sure enough,

yesterday the Federal Reserve raised interest rates by 25 basis points to a range of 5.25 to 5.5% delivering on all of those market expectations. Now, this marks the highest level for Fed rates in 22 years. And indeed, given how much people had anticipated that rate hike, pretty much all of the media's questions focused on what comes next, wondering what we could expect from Fed policy moving forward. KG as ever, Fed Chair Jerome Powell refused to address this topic with any real clarity, stating straight up that, quote, we don't want to provide forward guidance. At one point, Powell said, quote, I'm going to tell you again what we're going to do in September. We're going to look at two additional jobs reports, two additional CPI reports, lots of activity data.

That's what we're going to look at and we're going to make a decision then. That decision could mean another hike in December, or it could mean we decide to maintain at that level. Indeed, the big theme throughout the press conference was that of data dependence. However, with that, one very big note that made headlines was that Powell said that Fed economists were no longer forecasting a recession. That was because of a continuing strong labor market and higher than expected GDP growth numbers. Now, to the extent that we got anything, it did seem as though the Fed had gotten some indications that financial conditions might not be as tight as they had wanted. At one point, Powell, said, quote, what our eyes are telling us is that policy has not been restrictive enough for long

enough to have its full desired effects. We intend again to keep policy restrictive until we're confident that inflation is coming down sustainably to our 2% target, and we're prepared to further tighten if that is appropriate. And we think the process still probably has a long way to go. Some of the factors that pointed them in this direction include the recent resurgence in stock market and housing prices. Now, when it comes to rate cuts, basically don't even think about it this year. Powell at one point talking about what different people in the FOMC thought, quote, I think the median was several for next year, and that's going to be a judgment we have to make then, a full year from now. Now, in addition to just anticipating the rate hike, many economists

also agreed with the decision. Rabila Faruqi, the chief U.S. economist at high-frequency economics, said, quote, the data justified a move up in the funds rate given growth was stronger than expected, and the labor market continues to be strong. They didn't want to back off from hiking based on one better inflation reading. They need to see sustained easing in price pressures. Francis Donald, the global chief economist for Man in Life Investment Management, said, quote, we now believe that the Fed is on a prolonged hawkish hold. In our base case, their next move will likely be a cut, but it will take until 2024 until we see it. That said, Powell will have no choice but to keep the threat of hikes alive, lest he encouraged markets

to prematurely price in cuts and reignite inflation expectations. Now, the one other big strand of commentary was speculation around potential discord going on behind closed doors at the FOMC. City Group's Andrew Hollandhorst said, quote, It's definitely the case that there's a lot more going on behind the scenes in terms of the disagreement. He noted that although Powell is masterful at reaching a consensus among committee members, this often comes, quote, at the cost of clarity for Fed messaging. J.P. Morgan's Bob Michel said, I don't think the unanimity is the actual portrayal of what actually occurred in the meeting.

Now, one interesting point of tension going forward is that although now Fed economists are no longer forecasting a recession for this year, the bond market still is. The disconnect seems to be that the bond market believes that the Fed is going to be too focused on holding the line on inflation to read important signs before a recession comes. But with that, let's move quickly into a word from our sponsors and then to our main topic. Now, when it comes to sponsors right now, we've got the best in the business. In Wolves Clothing is the only startup accelerator dedicated entirely to Bitcoin and Lightning, thus making them the best, coolest, most interesting, most helpful, and most successful startup accelerator focused on.

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With that, let's move to our main topic. And that is, of course, the first time that standalone. and crypto legislation has made it out of the Congressional Committee process. Yesterday, the House Financial Services Committee voted in favor of a pair of crypto bills during a historic markup session. Now, markup hearings are where the drafting of legislation is finalized before a bill is presented for a vote in the full chambers of Congress. The first and most expansive bill being marked up was the Financial Innovation and Technology for the 21st Century Act. That bill started out as the digital assets market structure discussion draft, which was presented in early June by

Financial Services Committee Chairman Patrick McHenry and the Agricultural Committee Chairman Glenn Thompson. Remember, it was quite notable that two different committee chairs, one that oversees the SEC and one that oversees the CFTC, came together on that legislation. Now, the bill sets up a regulatory structure that includes providing the CFTC with authorities to set the rules for spot markets and crypto commodities, as well as clarifying the role of both the CFTC and the SEC and crypto regulation. The bill provides a pathway to register token issuance with the SEC and defines a process to certify a token network has sufficiently decentralized enough to be considered a commodity. Overall, the quite lengthy bill attempts to fill in numerous gaps in the regulatory framework and has

generally been viewed in the industry as imperfect but necessary. Now, the second bill dealt with by the committee was Tom Emmer's much more straightforward blockchain regulatory certainty act. That bill simply clarifies that crypto firms that do not act as custodians are not required to hold broker licensing. And while it's much less complex, that bill is no less important. It's designed to provide important regulatory carveouts from blockchain developers, wallet providers, and infrastructure firms from definitions that were introduced in the 2021 infrastructure bill. Still, the vast majority of the hearing dealt with the market structure bill, so that's where we'll be spending most of our time today. Basically, if you hear me referring

to the bill or the legislation, assume that I am talking about the market structure bill. Now, this was a contentious hearing. It began with Chairman Patrick McHenry setting the stakes. He argued that the legislation was necessary to prevent the U.S. from quote-unquote falling behind other jurisdictions who were moving forward with crypto regulation. As GOP Whip Tom Emmer put it, quote, If Congress does nothing, the United States will miss a huge opportunity, and Americans will suffer for it. One of the key crypto issues addressed in the bill is how the regulatory authority should be divided between the SEC and the CFTC. This division has become much more squirly with the recent ripple decision,

ensuring that tokens cannot be presumed to fall under the SEC. jurisdiction. McHenry even made a nod to that recent decision, noting that, quote, our comprehensive digital asset market structure legislation recognizes a key issue. Digital assets that are not inherently securities may be offered as part of an investment contract, but that does not make them securities. Now, the decision to assign the bulk of regulatory power over crypto commodities to the CFTC was one of the key points of disagreement during the hearing. Democrats appeared to view and argue that the CFTC was the softer regulator that would not

have the fortitude to clean up the industry and prevent future fraud. Now it's a little wild to deny that one of the biggest regulators in the country, the commodities regulator, is the appropriate agency to deal with crypto commodities based on their perceived levels of ruthlessness, but here we are. Another issue raised was that the CFTC might not be adequately funded to take on the crypto jurisdiction. Republicans, however, argued that an additional $120 million in funding was recently earmarked for the agency and could allow them to embark on the necessary expansion. It was raised that SEC Chairman Gary Gensler should have more input on this legislation, given that he also previously served as the head of the CFTC. Republicans, however, pointed out that they had requested comment and, quote, proactive

engagement from Gensler, as well as technical assistance from SEC staff weeks ago, but never received a full response. Finally, the bill provides a transition period which Democrats claimed would act as a safe harbor, protecting what they viewed as noncompliant crypto firms from the ongoing crackdown of the SEC. Senior Democrats, and I do unfortunately mean senior in every sense of the word, were firm in their opposition to the bill throughout the process. Ranking Democrat member Maxine Waters set the tone in her opening, stating, quote, I am disappointed that Republicans have made the decision to move forward with a massive market structure bill to rewrite our nation's investor protection acts. Stephen Lynch, the ranking Democrat on the Digital Assets Subcommittee, put it more bluntly,

saying, I've been on this committee for 20 years and I can say unequivocally that this is the worst piece of legislation that has been presented for markup in that 20 years. Now, as I said, there was a real age gap when it came to what Democrats thought of this. Younger Democrats appeared much more open to the concept that the crypto industry really does need substantial legislation to fill in regulatory gaps. Jim Heim said, quote, I am confident that this legislation, while not perfect, makes the status quo better. I am a deep skeptic of this industry, but we deserve better than the status quo. Himes also noted that his engagement with the legislation had been productive, with McHenry agreeing to every change the congressman had requested. In explaining his

reasons for voting for the bill, Congressman Ritchi Torres said, quote, I find myself unpersuaded that the status quo was working. My assessment is that the status quo is dangerously deregulated and requires regulation. So broadly speaking, what does the crypto community think of this bill? When it was first introduced, the reaction within the crypto legal community was extremely positive. However, a later amendment draft caused some particular concerns around the definition of digital assets contained in the bill. This draft excluded stocks, bonds, and other traditional financial instruments from being defined as digital assets, presumably to prevent regulatory arbitrage from tokenized stocks, and it was fear that these broad exclusions could inadvertently capture some crypto-native assets, like Dow tokens and

liquid staking derivatives. Gabriel Shapiro, the General Counsel at Delphi Labs, had been the main voice pointing out these issues last week, but he also felt that people like him had been heard. yesterday, Shapiro wrote, House staffers scrambled in the time since then to liaise with a lot of voices and I think they made the necessary fixes, though of course, some issues especially around Defi will remain unsolved. Still though, this bill would solve many fundraising issues around tokens. At the conclusion of the hearing, both bills were voted through the committee. Emmer's Blockchain Regulatory Certainty Act received support strictly along party lines,

while the market structure bill actually saw six Democrats to effect. The market structure bill is now scheduled for an additional markup hearing today in the House Ag Committee, which oversees the CFTC, where it is expected to pass through that hearing with Republican support. However, of course, additional amendments could be made during the markup process. The main issue for the bill's progress will likely be in the Democrat-controlled Senate. So far during this Congress, we've seen precious little indication from Senate Banking Committee Chairman Sherrod Brown that crypto legislation has any chance to pass his committee. Now, I think one of the biggest and most dynamic parts of this has to do with the partisanship

that has grown in and around the crypto space. yesterday was, to some extent, a rebuke of that. Chief Policy Officer at the Blockchain Association, Jake Trevinsky says, The Financial Committee just advanced the fit for the 21st Century Act by a vote of 35 to 15, including significant support from Democratic members. This sends a strong bipartisan message in favor of reasonable regulation for digital assets. Cody Carbone, the Vice President of Policy for the Digital Chamber of Commerce, wrote, six Democrats on the House Financial Services Committee joined all Republicans in passing the fit for the 21st Century Act.

It's a pretty loud rebuke of the ranking member for six to oppose her. I also think we will see several Dems in House Ag tomorrow support the bill, so it is a fairly significant coalition forming. Now, Gabriel Shapiro, noting just how contentious the hearing had been, wrote, Amazing and frankly somewhat shocking in light of today's negativity. Six Dems defected from the senior party line. McHenry and the staffers who worked on this are wizards. That may be the case, but there's also something else at work.

There is no part of me that feels like mental elasticity has to end at any sort of certain age. However, it's pretty undeniable that when it comes to members of Congress and the Senate, the biggest gap and line when it comes to crypto assets is not who got donations from SBF because that was just everyone. But of course, age. Justin Slaughter, the policy director at Paradigm wrote, ages of the six Democrats that voted for the bill, 35, 41, 47, 48, 50, 57, average, 46. average age of the rest of the House Financial Services Committee Democrats, 61. More than anything else, age dictates Democrat members' views on crypto and whether legislation on crypto is needed. Now, one of the great things about people like those six Democrats voting

for the bill is that it emboldens other progressive members of the crypto community to be louder about their views. Morrison Cohen lawyer, Jason Gottlieb wrote, I make no secret about being on the D side of the aisle. I truly believe in the progressive case for crypto. Tip of the House. hat to these Democrats for seeing the future of digital assets. And to my fellow Democrats in Congress who are wondering whether crypto is truly progressive, I'm happy to talk and show how smart new digital assets regulation is vital for progressive goals like consumer protection, equal opportunity, community power, and technical development. Anyways, guys, a lot more to go before anything like this becomes law, but yesterday was a good day, and we should all be pretty stoked about it.

Thanks to everyone in the crypto policy community for their work on these issues. And thanks, Thanks to a big number of our leaders for actually trying to get with the program. Finally, one more quick thank you to our sponsor in Wolf's Clothing, Wolf, WolfNYC.com to apply for their next cohort. And thanks, as always, to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.