The Breakdown - A Leading Candidate for Next Speaker of the House is One of Crypto's Biggest Allies in D.C.

Episode Date: October 4, 2023

After the ouster of Kevin McCarthy, speaker pro tempore is crypto ally Patrick McHenry, and one of the consensus leaders to replace McCarthy permanently is current House whip and frequent crypto bill backer Tom Emmer. NLW also explains the latest "L" handed to the SEC around its Ripple case. Today's Sponsor: Kraken Kraken Pro is the one-stop destination for pro traders - https://k.xyz/TheBreakdownPod 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 Wednesday, October 4th, and today we're discussing so many interesting political stories, broader U.S. political machinations that have some interesting implications for the crypto industry. Before we get into that, however, if you are enjoying the breakdown, please go subscribe to it, give it a rating, 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 in the show notes or go to bit.ly slash breakdown pod. Hello friends, happy hump day. Now, I mentioned yesterday that I wasn't going to do full SBF trial updates every day. My current plan, although it's of course always subject to change,

is effectively to save up every few days for really important stuff and give you the full rundown. Now that said, I will try to give you the very highest highlights if there's anything super important, and really the only big notable detail yesterday was around witnesses. In addition to the FTX leaders that we know had cut deals with the Justice Department and who were planning on testifying against Sam, including Gary and Ashad and Caroline, it appears as though former COO, Consent Wang, and probably most notably to the crypto community, former Alamedicoe co-CEO, Sam Tribuco, are also planning on testifying. Given that that other Sam has not been heard from, effectively since he went off on his boat in the summer of 2022, that one certainly got some tongues

wagging. Now that said, when it comes to the crypto industry and its actual future, the much more interesting story was drama in Congress. I'm excited to dig into that, but before we do, I'm also thrilled to announce that the breakdown today is welcoming a new sponsor. That sponsor is Cracken. Now, Cracken is a company I've known forever. Their founder and former CEO, Jesse Powell, is one of the true OGs of the space. And I've just known tons of super high integrity people who have ended up working with Cracken, and I think that that comes out in a lot of different ways, including them being super early, for example, to proof of reserves. I'm really excited to have Cracken on board as a sponsor, and so you will be hearing from them over the course of the show and in future shows as well.

But let's talk congressional drama and what it means for crypto. TLDR, House Republicans have plunged into disarray as the fallout from last week's narrowly averted government shutdown plays out. Specifically, House Speaker Kevin McCarthy has been ousted from his position after Matt Gates filed a motion to vacate, calling for a vote to remove the speaker. Now, this outcome always had some chance of being in the cards. McCarthy was elected speaker in January after a torturous, modern record 15 rounds of voting. McCarthy made a range of concessions and deals with various GOP factions in order to gather enough support to be elected speaker. Among them was a rule change that would allow any single house member to call for a vote to remove him at any time. Gates, who was one of

the primary agitators pushing for a government shutdown last week, unsurprisingly pulled that trigger on Monday evening. The last straw seemed to be the revelation of a secret deal between McCarthy and the Biden White House to ensure ongoing Ukraine funding. On Tuesday, the House voted 216 to 210 in favor of McCarthy's removal. Several conservative Republicans joined with Democrats to support the motion. This is the first time in U.S. history that the Speaker of the House has been removed by a vote. Indeed, even calling for a vote is extraordinarily rare, with the last one taking place over 100 years ago in 1910. Now, of course, there will be plenty of places where you can go discuss and hear about what it represents in terms of the state of American politics and the deepening divides within the Republican

Party. But that's not really what matters in the context of this show. What matters is that shortly after the vote concluded, Republican Chairman of the House Financial Services Committee, Patrick McHenry, assumed the speaker's role and gravel the chamber into recess. McHenry will now serve as the interim speaker until a vote can be held next Wednesday. So the first part of the story is, of course, that Patrick McHenry, as you will well know from listening to this show, is one of the most pro-crypto congressmen we have. As leader of the House Financial Services Committee, he has worked very hard to push a number of different bills, including the Stablecoin bill through. And so the fact that we now have an ally sitting in that vaunted position should be a powerful thing, right? Well,

practically speaking, the House will be held out of session until that vote next Wednesday, meaning that McHenry will not have an opportunity to advance a legislative agenda. Getting back then to who might end up as the Speaker, Gates and the rest of the House Freedom caucus don't have anywhere near enough votes to advance their own candidate, but they are numerous enough to act as a veto for other potential speakers. McCarthy, for his part, has said he does not intend to put his name forward for consideration in next week's vote. And so among a long list of potential candidates as a replacement, support appears to be coalescing around two options. First is House Majority Leader Steve Scalise. Scalise is currently finishing up treatment for blood

cancer but enjoys broad respect from both the establishment and radical wings of the Republican Party. The other leading candidate is House Majority Whip Tom Emmer. Emmer is of course known to the crypto space as a fierce advocate of sensible crypto regulation. He has advanced numerous bills on clarity for token issuers and resisting the creation of a CBDC. Now, Gates, for his part, has spoken kindly of both frontrunners. On Monday night, he said, I think the world of Steve Scalise. I think he'd make a phenomenal speaker. At the same time, Gates noted that unclear resolution of medical issues make it difficult to know whether Scalise will be an appropriate choice.

On Tuesday night, he said something very similar about Emmer and ended the day with a short list of six candidates he would be willing to support, including both Emmer and Scalise. Now, if Emmer succeeds and gathering the votes to become the next House Speaker, he has an opportunity to push forward a crypto-legislative agenda prior to next year's election. There are currently two bills which have been ratified by a committee and stand ready to be voted on in the House. One bill provides regulatory clarity for stable coins, while the other establishes a regulatory framework for the crypto industry more broadly, including a division of power between the SEC, and the CFTC. Neither bill is expected at this stage to have the votes to get past the Democrat-controlled Senate-controlled Senate-controlled Senate-controlled Senate-Chairman, Sherrod Brown, could be open to a deal with McHenry. Specifically, he might be willing to support crypto legislation in exchange for McHenry's support in passing cannabis banking reform. Now, we are still a long way from Emma being placed in charge of

the House agenda. There's no telling how long it could take to elect a speaker. The last time around this process took the better part of a week to resolve. And since then, the fractures within the Republican Party appear to have become more entrenched. Then after that, once a speaker is elected, crypto-ally or not, the number one consideration will be putting in place long-term government funding. The stopgap funding measures which were passed last weekend will run out in mid-November. The House Freedom Caucus has grown increasingly clear in their calls to reform the way congressional appropriations operate. Since 1990, the U.S. government no longer puts forward formal budgets with individual financing bills. Instead, the government is funded using

omnibus legislation, which deals with the entire annual spending in one gigantic bill. Gates called for a major reform of this system and a return to fiscal conservatism on Tuesday night in front of Congress. Gates said, you know what I think paralyzes us? Continuing to govern by continuing resolution and omnibus. You know what I think throws this institution into chaos? Marching us towards the dollar not being the global reserve currency anymore. Real chaos is when the American people have to go through the austerity that is coming if we continue to have two trillion dollar annual deficits. Now, Democrats for their part appeared content to allow the chaos to play out. ahead of voting with the House Freedom Caucus to remove McCarthy as Speaker, House Democrat leader

Hakeem Jeffrey said that the chamber has, quote, plunged into unprecedented dysfunction. So bringing it back around to the crypto industry, I think there are a couple things to note. One, even if we get Emmer, his hands are somewhat going to be tied by the legislative body that he inherits and all of the challenges that it represents. As you've probably heard over and over from me, my base case is that we effectively limp over the line of the next election cycle without really getting much done in legislation of any form between now and then. Could this regalvanize people and lead to some better outcomes? It's totally possible. But for those who are looking for the sunny side for crypto, it's probably very measured

in terms of potentially nudging these few bills that have some amount of momentum forward rather than some big radical overhaul. Still, of course, if you're going to choose between a crypto ally as the Speaker of the House and not a crypto ally, it's pretty clear who we want. Now for the second half of our show, we are going to stay in government land. But before we do that, a quick note from today's sponsor, Cracken. Cracken Pro is an incredible resource for advanced and professional traders. The all-in-one experience allows advanced traders to switch seamlessly between spot trading and other advanced products with a UI that is highly customizable to your unique trading style. With institutional great performance, Crackin Pro is Cracken's most powerful platform ever.

Go to pro.cratkin.com to get started. Thanks again to Cracken for supporting the breakdown. All right, so as I mentioned, the other big story is that the SEC has been denied an chance to appeal the Ripple case. On Tuesday, the judge refused to grant the SEC certification to pursue an interlocutory appeal. An interlocutory appeal is when a party is allowed to appeal a partial decision in an overall lawsuit before the case has been fully decided. The SEC had sought to appeal two parts of the decision from the Ripple case prior to a full trial on the question of whether Ripple executives had aided and abetted securities laws violations. Those two parts of the proposed appeal, were that sales of Ripple tokens to retail investors through an exchange, known as

programmatic sales, as well as the distribution of tokens to contractors and staff, both constituted unregistered securities transactions. The judge said that the SEC had failed to meet the legal standard required to bring an interlocutory appeal. Specifically, they wrote in their order that the SEC is not arguing that the court applied the law incorrectly. Instead, the SEC argued that the judge incorrectly applied factual analysis of the Howie test to the specific set of circumstances in the case. Digging in, the judge clarified their original decision. They wrote that they had not ruled that sales of tokens through an exchange can never produce a reasonable expectation of profits based on the efforts of others in order to satisfy the Howey test. Instead, the judge's decision

was that the specific set of facts presented in the Ripple case did not satisfy the Howey test. As an extension of that logic, the judge also rejected the idea that the Ripple case has significant precedential value for other token cases. They stated that that would misconstrue the court's ruling. The order clarified that, quote, court held that based on the totality of the circumstances in this case, including an examination of the facts, circumstances, and economic realities of the transactions, Ripple's programmatic sales could not lead investors to reasonably expect profits from Ripple's efforts. The judge explained that their analysis was based on a multitude of factors and, quote, did not turn on the fact that

Ripple's offers and sales were on crypto asset trading platforms. They even referred specifically to an order made in the TerraForum Labs lawsuit as well as the library case, and stated that the decisions were not in conflict because they deal with entirely separate sets of facts. Peels are only allowed to deal with the dispute on the state of the law rather than a disagreement on how the law has been applied in a particular case. In rejecting the SEC's argument that there was a substantial disagreement about the state of the law, the judge wrote that, quote, mere conjecture that courts would disagree on the issue is insufficient. Instead, there must be substantial doubt that the district's court order was correct. To simplify it down, the judge appears to be saying that there is no dispute that the Howey test

is the correct legal theory to apply in the ripple case, nor, is there any dispute about the judge's understanding of the Howey test? The only disagreement the judge could find on the SEC's application was in how this judge applied the Howey test to the specific facts of the case. The judge ruled that this was not a disagreement subject to appeal. So what are the takeaways of this ruling? Well, one, the decision seems to severely restrict the SEC's ability to appeal the ripple decision whatsoever. If the regulator wants to bring an appeal, they will need to find new grounds and

argue that the judge got the law wrong rather than simply made a decision that they disagreed with. More broadly, this order seemed like an implicit criticism of the SEC's strategy of regulation by enforcement. If each token case relies on a separate set of facts and is of limited precedential value, the theory that the SEC can simply win a handful of cases and apply those precedents broadly across the entire industry appears much more shaky than it previously might have. Finally, the judge in the Ripple case appears to have given a lot of thought on how to make their decision unable to be appealed. This order did not give the impression that the judge was looking to make decisions that would need ratification in an appellate court.

Instead, it appears that the original Ripple decision was written in such a way to make it resistant to appeals. They seem to have thought through the arguments that might be made to force an appeal and worked around them in advance. In terms of what's next, the judge set a trial date in April to deal with the remaining issues in the case, and the SEC will be able to make another attempt at an appeal once that trial winds up. Now, a lot of folks in the industry were, of course, very excited about this. Brad Garlinghouse, the CEO at Ripple said, The SEC's request to file an interlocutory appeal is denied. I'm not a lawyer, but it seems like the court just told the SEC,

you asked me to apply the Howie test. I did, and like it or not, you lost. Johnny Deaton says, let me add, my very quick perusal of her order is untouchable. She stated that she's never said that no digital asset could ever be a security sold on an exchange, just that XRP in this case wasn't one, and that even though some XRP acquirers purchased it for speculation, the SEC didn't prove it was tied to the efforts of Ripple. Now, on the flip side, although the judge's decision was fairly firm, some crypto lawyers did caution against celebrating too early.

Gabriel Shapiro, the general counsel at Delphi Lab, said, don't get too excited about the denial of SEC's interlocutory appeal and ripple. It doesn't mean the SEC lost its appeal. It means that if the SEC wants to appeal, it has to appeal everything at once after the trial. Still, some useful clarification of Judge Torres' opinion. Consensus lawyer Bill Hughes, however, thought the decision was a more significant blow to the SEC, tweeting, SEC served another L in the Ripple case. Crypto has been calling BS on this making it up as you go approach.

Good to see at least one court also taking note. So friends, overall, a fairly exciting day in crypto land. We got a demonstration of how U.S. politics, as disconnected as it might seem from crypto, actually has an impact on how the industry might grow and develop in this country. And we got yet further evidence. Then when it comes to the rule of law and protecting this industry's right to, you know, be an industry, the courts are, at least at this time, our best backstop. In any case, that is where we will write.

out for today. Excited to share more evolutions with you as they come. Thanks one more time to Cracken for sponsoring the breakdown. And until tomorrow, be safe and take care of each other. Peace.