The Breakdown - A Surprise Crypto Bill Veto in California

Starting point is 00:00:00 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 nexus.com, and FTCS, and produced and distributed by CoinDesk. What's going on, guys? It is Monday, September 26th, and today we are catching up on the crypto news, starting with a surprise veto in California. 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 Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod.

Starting point is 00:00:45 Also a disclosure, as always, in addition to them being a sponsor of the show, I also work with FTX. All right, folks, happy Monday and boy oh boy, the fear of last week is definitely creeping into this week's beginning as well. Last night, there were absolute fireworks in the foreign exchange and currency markets specifically around the British pound. Alex Kruger put it in historical context. Last night's GbP flash crash, he writes, was almost as large as the infamous Soros-driven Black Wednesday of 1992. September 16th, 1992, down 4.8%. September 26th, 2002, down 4.3%.

Starting point is 00:01:23 The pound hit an all-time low against the dollar around $1.039 to the pound. A big theme, in fact, this week that we'll be discussing is the dollar wrecking ball, and what it means that the dollar is so strong versus absolutely everything right now. Another theme that continues to grow in the public consciousness is the golden handcuffs real estate discussion that we talked about last week. This was summed up in a viral tweet from John F. Carter who wrote, housing supply question, is anyone who locked in a sub-3% mortgage going to sell their home so they can get a new house with a 6% mortgage? Overall, it just feels to me like there's something of a crescendo happening in financial markets, where the roiling is

Starting point is 00:02:02 getting louder and something is happening. Cantering Clark writes, there were little stress fractures forming for the last few months, but in the last two weeks, it looks like actual cracks have opened up. How long before in all correlations go to one event in markets? In any case, here's some of what we have to look forward to on the macro side this week as summed up by TED Talks Macro. Monday, European Central Banks, Christine Lagarde speaks. Tuesday, Fed Chair Jerome Powell speaks on the future of digital assets. Wednesday, Powell speaks on monetary policy, Thursday, U.S. Final GDP for Q2, Friday, USPCE data. Also, there's an FOMC member speaking every day this week. So that is the preview on the macro side, and I think

Starting point is 00:02:44 it's poised to be just as explosive, if not more so, than last week. However, where I want to start today's show is with a surprise action in the crypto space from late last Friday. On Friday, California Governor Gavin Newsom vetoed that state's crypto bill, which would have established a licensing and regulatory scheme that was seen as equivalent to New York's Bit License. For those of you who don't have the immense pleasure of being in the crypto industry from New York State, the Bit License has grown to be seen as an unworkably tight licensing scheme. In its seven years of operations, only 18 companies and six limited purpose trusts have been granted a bit license. Most firms have found the cost of compliance too high and

Starting point is 00:03:22 instead chosen not to operate in New York State. The California bill passed their assembly in August and would have required California licensed entities to only interact with stablecoins issued by banks or otherwise state licensed organizations. It would have forced stablecoin issuers to remain fully backed by reserves, and it would have set up licensing and examination processes for crypto companies. In his note explaining the veto, Newsom wrote, on May 4, 2022, I issued executive order N922 to position California as the first state to establish a transparent regulatory environment that both fosters responsible innovation and protects consumers who use digital asset financial services and products, all within the context of a rapidly evolving federal regulatory picture.

Starting point is 00:04:02 Over the last several months, my administration has conducted extensive research and outreach to gather input on approaches that balance the benefits and risks to consumers, harmonize with federal rules, and incorporate California values such as equity, inclusivity, and environmental protection. Newsom went on to explain that it would be, quote, premature to create a licensing regime without considering the feedback from that executive order. He also noted that future federal legislation or regulations may supersede any Californian regulatory structure. Quote, A more flexible approach is needed to ensure regulatory oversight can keep up with rapidly evolving

Starting point is 00:04:34 technology and use cases and is tailored with the proper tools to address trends and mitigate consumer harm. The governor also noted that the bill would have required a multi-million dollar expenditure which had not been budgeted for. Tim Grayson, the assembly member who sponsored the bill, expressed his disappointment in a statement. He wrote, The cryptocurrency market is under-regulated at best and deliberately

Starting point is 00:04:54 rigged against everyday consumers at worst. A financial market cannot be considered healthy if there are no guardrails in place to protect consumers from scams and bad actors. As chair of the banking and finance committee, I will continue to work to protect California's consumers and responsible industry. The legislature overwhelmingly supported regulating digital financial assets, and I can only hope that the administration will be willing to work with us to achieve this goal in the future. Now, what's notable about this veto is that the bill was extremely popular in the Assembly. It received 71 yes votes, zero no votes, and nine abstentions. So it's a big political deal that Newsom said no. Important context, though, the veto is one of eight bills vetoed by Newsom on Friday, and part of

Starting point is 00:05:33 the reason is a state budget crunch. After recording record budget surpluses in the previous two years, California tax revenues for 2022 are currently coming in at $4 billion below forecasts. The governor's note for this slew of recent vetoes claim that the bills which crossed his desk this month represented $30 billion in unfunded and unbudgeted spending. quote, with our state facing lower than expected revenues over the first few months of this fiscal year, it is important to remain disciplined when it comes to spending, particularly spending that is ongoing. End quote. The budget situation in California isn't in any sort of dire straits. The state currently has $37 billion in reserve accounts. However, any drop in tax revenue does force tough choices.

Starting point is 00:06:11 Does the government want to have access to more fiscal support and social support, or does it want to burden itself with expensive regulatory departments? Now, this brings us to three very different interpretations of this news. The first interpretation was that this was a victory for common sense, taking Newsom at his face when he said a more flexible approach is needed. Jake Chavinsky writes, Governor Gavin Newsom deserves serious respect for making the right call by vetoing AB2269, the BIT license copycat bill that passed the California legislature by a wide margin, 71 to zero, in the assembly. That takes guts, and he did it for the right reasons. Mike Dudus of Sixth Man Ventures writes, kudos to California Governor Newsom. New York's bit license has been an unmitigated disaster,

Starting point is 00:06:52 encouraging regulatory capture, harming innovation, and pushing legit businesses out of state, all while failing to protect New York consumers. A second interpretation of this really honed in on the fact of California's budget shortfall. Effectively, some people argued that this bill would have created an office with a big budget attached that would have basically been sitting around not approving things. In Newsom's note, he wrote, standing up a new regulatory program is a costly undertaking, and This bill would require a loan from the general fund in the tens of millions of dollars for the first several years. Such a significant commitment of general fund resources should be considered and accounted for

Starting point is 00:07:24 in the annual budget process. Basically, Newsom is saying that there is a real question of whether these sort of regulations are a good use of funds, especially during a downturn. In California, there's also the issue of capital flight. The state has seen a fairly significant exodus of high-tech entrepreneurs and investors, especially as remote work has normalized post-COVID. These are folks who don't want to deal with California taxes anymore. And so creating another reason for an entire category of industry to leave doesn't necessarily seem super savvy.

Starting point is 00:07:51 The third interpretation of this is why do a state-level thing when there is soon going to be a federal regime? Ryan Selkis of Bessari summed up this take. Credit where it's due, Gavin Newsom deserves kudos for not signing CA's version of the bit license. But it's hard to clap too hard when he's measuring the drapes in the White House for 24 and may prefer to sign a federal bit license. Now, I will say that even with this take, there is a caveat or two different ways to look at it. There is a cynical version that says that Newsom is no friend of crypto and thinks there are harsh rules coming. But then there's the less cynical version that thinks this is just practical, because wherever the rules land on the spectrum of restrictive on the one end or indulgent

Starting point is 00:08:27 on the other, they're coming. And they're likely going to supersede whatever California says. So why not deal with that reality? It was one thing for states to consider these state-level regulatory regimes when U.S. level regulations were far off, but obviously those U.S. rules seem closer and closer than ever. I also think zooming out a little bit, Eric Conner's point is valid when he wrote, The regulatory fear porn is the highest it's ever been for crypto, amplified and bare when no one seems to be enthusiastic. Law and regulations are a constant give and take.

Starting point is 00:08:56 Of course, out of the box, crypto is going to face skeptics and overreach. That will change with time. It's important to support people in Washington or wherever you live who are trying to educate selected officials about crypto. And of course, first and foremost, vote. Politicians will change their tone fast once they are losing votes due to misinformed crypto stances. Just watch.

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Starting point is 00:10:42 FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCS, you pay no gas fees. Download the FTCX app today. and use referral code breakdown to support the show. At the end of all of this, my feeling is that, one, it's good this didn't get voted in. And so on some level, I don't exactly care what the reasons for that are. But two, I think that understanding the reasons and context behind it are important to discuss, if only so that we don't fall into the trap of valorizing single politicians.

Starting point is 00:11:18 Our engagement with politics tends to work much better when we have a dispassionate read on incentives and motivation. Speaking of politics, one thing you'll sometimes hear as relates to the general geopolitical game theory behind parts of the crypto industry, such as Bitcoin mining, is that the U.S. will at some point realize that it is in its national security interest to have crypto activity concentrated here. Bill Hughes, a lawyer at Consensus, writes, if you don't understand that U.S. security interests are center of mind when certain critical policymakers look at crypto, you'll never be able to follow what's happening or persuade any of them. Validating that take, the Defense Advanced Research Projects Agency or DARPA has launched a year-long project to better understand how

Starting point is 00:11:55 crypto interacts with national security. Inca Digital has been awarded a grant to conduct the research within the project labeled mapping the impact of digital financial assets. It will cover the use of crypto for money laundering, terrorist financing, and sanction evading, as well as investigating how crypto markets may impact traditional financial systems. Darpo, which is housed within the Department of Defense, has a long history in studying and funding emergent technology, most notably having played a huge role in developing and guiding the early internet. Adam Zarazinski, the CEO of Inka Digital, said, given the increasing prevalence of digital assets, assets, the Department of Defense and other federal agencies need to have better tools to understand

Starting point is 00:12:29 how digital assets operate and how to leverage their jurisdictional authority over digital asset markets globally. Mark Flood, a program manager with DARPA said, The program underway here involves mapping out the cryptocurrency universe in some detail. We need to acknowledge that the financial sector may be a component of modern warfare going forward, and anything we can do to reinforce and protect the U.S. financial sector and our allies' financial sectors is beneficial. Flood mentioned that the goal is not to build surveillance tools, but rather to develop a big picture view of how crypto networks are used by rogue states and criminal organizations.

Starting point is 00:13:00 He said, DARPA is not engaged in surveillance. I'll emphasize that we are careful in this research that we do not get involved in personally identifiable information. Now, to me, the most interesting part is the outlawed acknowledgement that the, quote, financial sector may be a component of modern warfare. This certainly validates everything we've seen over the last few years as regards sanctions, but recognizing it as such might change the way that the U.S. government looks at things like a digital dollar or stable coins or any variety of,

Starting point is 00:13:25 of other digital assets. Next up, the latest in the Doe Kwan saga. As was intimated last week, Interpol has issued a red notice for Doe Kwan. Although this information came through Bloomberg via prosecutors in Seoul, and Interpol, Kwan, and Terraform have not replied to request for comment. More likely to be of interest for U.S. crypto users was news late last week that on Thursday, a New York judge granted permission for a John Doe summons from the IRS to be served on MI-Safra Bank, which banks crypto prime brokerage S-Fox. The John Doe summons allows the IRS to request information on unknown potential tax evaders without providing full information on their identity or the details of any crime committed. Essentially, the order is seeking generalized data,

Starting point is 00:14:04 which allows the IRS to confirm whether or not the bank's clients are properly reporting their taxes. IRS Commissioner Charles P. Reddick said in a DOJ press release, the government's ability to obtain third-party information on those failing to report their gains from digital assets remains a critical tool in catching tax cheats. The court's granting of the John Doe summons reinforces our ongoing significant efforts to ensure that everyone pays their fair share. Importantly, NYSafra Bank is not alleged to have engaged in any wrongdoing. John Doe summons were served on Circle, Crackett and Poloniacs in 2021, seeking financial records for all users with over 20,000 in transactions since 2016, and there was also a highly controversial use of a

Starting point is 00:14:40 John Doe summons against Coinbase in 2016, where Coinbase refused to comply with the summons, which they viewed as overly broad. Partial compliance was ultimately ordered by the court in 2018. And finally, speaking of U.S. regulatory agencies, Congress is a attempt to put forward the CFTC as the primary crypto regulator has taken another step forward. Last week, Democratic Representative Sean Patrick Maloney introduced a companion bill in the House of Representatives in support of the Senate bill, which is already progressing. Companion bills are duplicate bills introduced to speed progress through both houses of Congress simultaneously. Maloney said, quote, it is essential that we have robust oversight and regulation

Starting point is 00:15:15 so that we may provide strong consumer protections. It's unclear whether there is enough time before midterms for the bills to be passed in the House and Senate. House Republicans from the agricultural committee had already introduced a similar bill, the Digital Commodity Exchange Act, that hasn't shown any signs of progress in the House for months. Now, interestingly, there has been a lot more fighting about the CFTC as regulator du jour since their action against the Dow came out last week. In fact, we're starting to see some fracture within the Twitter community away from the policy subset. Ryan Selkis writes, CFTC bailed out crypto this week and most people don't really know it. Crypto policy folks were

Starting point is 00:15:48 so desperate to avoid Gary Gensler we fond over another regulator. The CFTC Dow enforcement language shows how bad policy should be fought, not settled upon. Slopierre clarified Selkis' point, saying, I believe he's saying bailed out, as in because the CFTC took this atrocious action before major crypto-regulatory decisions are done, we can now all see that running into the arms of the CFTC is not a good plan. Now we can all be smarter about how we advocate for jurisdiction. On top of comments like this, there has also been some high-profile back and forth between members of the crypto-legal community, notably between Gabe Shapiro, the general counsel at Delphi Digital and Jake Chravinsky, the head of policy at the Blockchain Association. My take is that this

Starting point is 00:16:26 was sort of inevitable. Politics is all about messy compromises that leave everyone feeling a little frustrated, but at least it's not as bad as it could have been. Any sector would have differences between the people who are most involved representing them on the front lines of those compromises, but that is heightened massively in crypto where, one, industry participants tend to have extremely strong ideological starting points, some of which run counter to state authority in general, and two, industry participants also have an extreme disinclination towards any sort of being represented by policy and lobbying associations in the first place. Between those two things, of course there's going to be tension. I think it's good to have a strong, well-funded

Starting point is 00:17:01 crypto policy lobby that gets deep enough to really understand the specific contextual politics and who can help nudge things to a better place than they might have been, to do the gross, messy work of education and sometimes fruitless advocacy that just takes a ton of time. I also think it's good to have a loud, engaged public who want those policies. advocacy advocates to nudge a hell of a lot farther than they ultimately can. I do think Selkis is right that the CFTC actually did the industry a solid in reminding everyone that the answer to U.S. regulatory questions needs to not just be about giving ownership of those questions to one specific body, but instead about actually defining the principles that would underlie how any

Starting point is 00:17:37 agency would regulate the industry. So hopefully that's more of what we see. For now, I want to say thank you to my sponsors, necto.io, chain analysis and FTX, and thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace. I want to tell you about CoinDesk's new event, the investing in digital enterprises and asset summit or ideas. The event facilitates capital flow and market growth by connecting the digital economy with traditional finance.

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The Breakdown - A Surprise Crypto Bill Veto in California

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