The Breakdown - A New SEC Chair Who Actually Understands Bitcoin and Crypto?

Episode Date: January 14, 2021

Today on the Brief: Visa drops $5.3B Plaid acquisition after DOJ antitrust suit ECB President Christine Lagarde discusses bitcoin and digital euro  Acting OCC chief Brian Brooks to step down this week  Our main discussion: Gary Gensler rumored to be the new SEC Chair. In this episode, NLW discusses: Gensler’s background at Goldman, CFTC and MIT Gensler’s MIT course Previous statements on Bitcoin, Ethereum, and Ripple The crypto communities reaction to Gensler at the SEC 

Gary Gensler is a partner we can work with. He's going to try to bring the space in line with the regulatory mainstream. But he also appreciates what makes it different, where the opportunities lie. And he's years and years ahead in his understanding from almost any regulator we've seen in the difference between Bitcoin and other parts of this space. You have to see this as about as positive an appointment as we could have in a really key position for the regulatory battles to come. 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 nexo.io and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, January 13th, and today we have a very regulatory breakdown with our main discussion about a new SEC chair who actually understands Bitcoin and crypto. First up, however, let's do the brief. Kicking off the brief today, Visa has dropped its planned $5.3 billion acquisition of Plaid. Plaid is a key piece of Silicon Valley fintech infrastructure that builds a bridge between traditional bank accounts and digital platforms. They have financial services APIs that make it really easy for developers to integrate

requests for banking information. In addition to its work in the traditional finance, space, Plaid is used by a huge number of companies in the crypto space, including Coinbase, Dharma, Teller Finance, and more. Their head of UK is actually a former Google Wallet builder and has a particular interest in Defi. In January 2020, news broke that Visa would be acquiring the company for $5.3 billion, which is about double the $2.65 billion valuation in the company's last private round that included Visa and MasterCard, as well as some storied Silicon Valley firms. The acquisition, it turns out, was not to be. On November 5th, the DOJ filed a civil antitrust suit to stop the merger. The accusation was against Visa, claiming they're a monopolist and online debit because they charge both consumers and merchants billions in fees each year.

A few months later, on Tuesday, the DOJ announced that the companies had officially called off their merger. Said the Assistant Attorney General, now that Visa has abandoned its anti-competitive merger, plad another future fintech. innovators are free to develop potential alternatives to Visa's online debit services. With more competition, consumers can expect lower prices and better services. So why does this matter? I don't have particularly strong feelings about this deal one way or another. This might actually be a decent antitrust case that leads to more innovation from Plaid and others, and certainly I have no need for Visa to own even more financial infrastructure. Regardless of one's take on the specifics, however,

the biggest reminder, I believe, is that the slumbering dragon of antitrust has awoken. We've seen cases against Google, Facebook, Visa, and it seems like this is just beginning. Next up on the brief today, the ECB's Bitcoin funny business. European Central Bank president Christine Lagarde gave a speech at a Reuters event online Wednesday, and there were a few choice nuggets. First, on Bitcoin, she said that loopholes are needed to be closed, that it had been used for money laundering and other funny business. Basically, she called for a global regulation standard. Her exact quote was Bitcoin is a highly speculative asset, which

has conducted some funny business and some interesting and totally reprehensible money laundering activity. My take on that is, I mean, whatever. This is boilerplate speak for central bank presidents, big regulators, et cetera. Nothing new, nothing particularly vicious. And I think that when it comes to real animosity on the part of regulators in central banks, it's going to be directed at Fiat stablecoins first, which strike them as much more of a threat than Bitcoin, which for Bitcoiners should be a good thing. Speaking of which, she reiterated the likelihood of a digital euro, suggesting it would take no more than five years. So the digital euro is on the agenda. It's coming. Full speed ahead. Last up on the brief today, Brian Brooks to step down. Something that we've sadly anticipated is coming

to pass. The acting head of the U.S. Office of the Comptroller of the currency, Brian Brooks, is set to leave the agency in the next few days, according to Politico. He joined the agency last March and was named Acting Comptroller last summer. Before that, of course, he was the chief legal officer at Coinbase. Brooks wasted absolutely no time at the OCC. He kicked off in the summer with a push for fintech startups to be able to apply for national banking charters. They provided guidance on custody that said banks could custody crypto assets.

They provided guidance on stable coins that said that banks could work with stable coin issuers. They provided most recently guidance on public blockchains saying that they could be used akin to SWIFT as payments infrastructure. These are all pretty transformational changes. So it's no surprise that some folks in Congress weren't particularly happy about them. Brooks was nominated for a full term but never confirmed and it seems likely that Biden will have his own pick. The question now is what happens next? Maxine Waters, the chair of the House Financial Services Committee, a letter recently asking President Biden to rescind all of the OCC's crypto-related guidance. So this could be a battle for the early part of the new administration.

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Get started at nexo.io. Let's shift to our main discussion. Gary Gensler, a man who actually understands Bitcoin and crypto, is reportedly going to be named the SEC chairman. To get a little bit of background on what this means, it's important to zoom out to the entire U.S. regulatory regime for crypto assets. There are many different offices that have a stake in crypto regulation. The IRS sees them as property and taxes them as such.

The CFTC sees Bitcoin and Ethereum as commodities and so acts as such. The SEC has been a prominent actor in the crypto space because they have the power to designate new assets or tokens as securities, which significantly changes how they can be bought, sold, and marketed. This is why most of the times you've heard about the SEC interacting with crypto over the last couple years, it's been to bring or settle a lawsuit against a token project for an unregistered security sale during the ICO days. The SEC has five commissioners, one of whom is the chairman.

Over this last period, the chairman has been Jay Clayton, and while not an outright enemy of crypto, you certainly wouldn't call him a friend either. Just after Chairman Clayton announced his resignation, I had Commissioner Hester Purse on the show, and we discussed the legacy of the past few years. To be honest, she wasn't particularly animated about their successes. In fact, she basically said that they had done too little and taken too long to do it. Commissioner Perce has a long-standing notion of creating safe harbors for experimentation in new areas like crypto. The basic idea being that projects should be able to engage in a good-faith way

with the SEC while in their early centralized stages, understanding that the security-ness of their offerings might change over time to something that looks more decentralized and less like a security. Anyway, the question for a while has been, who would replace Clayton and what would it mean for Bitcoin and crypto as a whole. Today, Reuters reported that Biden's pick would be Gary Gensler, and the industry is pretty happy about it. Gensler has bounced between government, academia, and the private sector. He was in Clinton's Treasury Department. He was a partner at Goldman Sachs, but he really came to prominence as chairman of the Commodity Futures Trading Commission under Obama. In that capacity, he spearheaded new derivatives rules after the 2008 financial crisis.

More importantly, however, since the end of that role, he has spent some serious time exploring the blockchain and crypto space. After his CFTC days were done, he took a position at MIT's Sloan School of Business as a senior lecturer and a senior advisor to the MIT Media Lab. In 2018, he taught a course about Bitcoin, blockchain, and cryptocurrencies, saying, this technology has real potential as a catalyst for change in the world of finance and the broader economy. The course had two-sacrower. sections. Part one was the foundation of blockchain, the foundation being Bitcoin. It also got into a larger set of technology issues, features, smart contracts, et cetera. And part two was practical applications in the financial sector. A keynote, this was 2018, and he was still entirely

focused on the financial sector, which was not, if you'll remember, what much of the ICO movement was about. In that second part, he also had people explore the potential uses in other countries in context than the U.S., including China and Kenya. You can reasonably quibble about the syllabus, but let's just see what course Jay Clayton could have produced on this industry is all I'm saying. What about his positions then vis-a-vis this industry? First, he's had a lot of interesting quotes on Bitcoin specifically. An example is this one.

I remain intrigued by Satoshi's innovations potential to spur change, either directly or indirectly as a catalyst. The potential to lower verification and networking costs is worth pursuing, particularly to lower economic rents and data privacy costs and to promote economic inclusion. Now, in 2018, as he was taking on that MIT role, he was also giving speeches and interviews about similar topics. In that period, he said that both Ether and Ripple had most likely been issued and traded in violation of American securities registrations. Since then, ETH has been moved over into the commodities bucket by the CFTC, and it seems unlikely that it would be a target again. What's more, even back then, he said

that the issue with Ethereum was token sold before the network was functional, but it was much more decentralized now, given that it was distributed via miners on the network. Indeed, he saved his strongest consternation for Ripple. Effectively, his argument was that the company that develops Ripple primarily still holds most of the token and does most of the work to make the software and the token valuable, which sounds like a perfect fit for the Howie test that determines whether something is a security or not. Now, this is, of course, likely bad news if you're hoping that the recent XRP lawsuit goes away. In July 2018, Gensler testified before the U.S. House Committee on Agriculture. In those discussions, he pushed back on the comparison between

crypto and Ponzi schemes. He also published 28 pages of prepared remarks, and if I had to do a TLDR on them, it's this. Regulate the right way, which involves giving a lot of freedom to places like the CFTC to really consider the specifics of these new worlds, and you could get a flourishing of powerful new financial infrastructure. With the potential he wrote of lowering costs, risks, or economic rents in the financial sector which represents 7.5% of the U.S. economy. The conclusion of that testimony was this. In conclusion, blockchain technology has a real potential to transform the world of finance. Though there are many technical and commercial challenges yet to overcome, I'm an optimist and want to see this new technology succeed. It could lower costs,

and economic rents in the financial system. It's very clear that he's interested in a lot of the opportunities here, getting rid of certain types of counterparty risk, making it easier to transact and settle, and getting rid of exploitative intermediary actors. So what now are others saying in the Bitcoin space? Vijay Boyapati tweeted, Gary Gensler is to be made head of the SEC.

Takeaways. Generally, Bitcoin supportive, believes XRP is a security, far superior to Mnuchin. Now, Vijay clarified in his comments that he knew that Mnuchin was the Treasury Secretary and this wasn't an apples to apples comparison, but I think in some ways what he was saying is that this might be the leading crypto voice in the administration. Jake Chirvinsky said Gary Gensler deeply understands crypto and has strongly supported Bitcoin for years. His selection as SEC chairs signals a policy shift in favor

of a Bitcoin ETF. He also went on record in 2018 saying there's a strong case that XRP as a security, signaling no shift on that issue. Gabriel Shapiro tweeted, I'm very excited Gensler will be the new SEC chair. On crypto, it seems like you really gets it and will regulate the bad stuff while giving breathing room to the good stuff. Really hope we can get some safe harbors in place with reasonable disclosure requirements. Scott Melker said Gary Gensler may be the hero we need but don't deserve, and Nick Carter with perhaps uncharacteristic brevity said, Gensler news is very positive. My two cents is that this is a part of the we can work with. He's not someone to allow excess or unfettered wild westness, so don't expect that.

He's going to try to bring the space in line with the regulatory mainstream. But he also appreciates what makes it different, where the opportunities lie, and he's years and years ahead in his understanding from almost any regulator we've seen in the difference between Bitcoin and other parts of this space. I think if you're interested in the future of Bitcoin and in the crypto industry as a whole, you have to see this as about as positive an appointment as we could have in a really key position for the regulatory battles to come. Anyways, guys, let me know what you think about the gensler appointment. Hit me up on Twitter at NLW. Talk to me in the YouTube comments. As always, I appreciate you listening. I appreciate your ratings and reviews. They're making a

huge difference. The audience is growing and I love every minute of it. Until tomorrow, guys, be safe and take care of each other. Peace.