The Breakdown - A Treasury Hearing On Crypto and Illicit Finance -- But Does Anyone Care Anymore?

Episode Date: April 11, 2024

Congress is back in session and apparently crypto is high on the agenda. At the same time, the crypto industry seems to have better things to talk about now. Today's Show Brought To You By Ledger - 5% to Bitcoin Developers When You Buy https://shop.ledger.com/pages/bitcoin-hardware-wallet 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, April 10th, and today we are talking some politics. 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. All right, friends, some political machinations to discuss today, including a Treasury hearing. For those not paying attention, this is the first sitting week for Congress after a two-week break, and for whatever reason, it feels like crypto was at the top of the agenda.

Treasury Deputy Secretary Wali Adiyamo appeared before a Senate Banking Committee hearing on Tuesday. The hearing was intended to provide an update on the Treasury's actions to combat illicit finance, terrorism, and sanctions evasion. Adiyamo uses written testimony to focus exclusively on crypto, arguing that Congress needed to provide the Treasury with additional tools. He acknowledged that, quote, terrorists prefer to use traditional financial products and services, but we fear that without congressional action to provide us with the necessary tools, the use of virtual assets by these actors will only grow. The hearing was highly anticipated among crypto lobbyists.

So far, Congress has not accepted Treasury's request for more crypto tools. Earlier in the week, there was a sense that Adyamo could finally be successful in convincing Congress that these tools are truly necessary. Chairman Sherrod Brown introduced the hearing with a huge list of illicit finance issues currently being tackled by the Treasury, ranging from Houthi rebels in Yemen to the Russian war machine. High-profile headlines about the use of crypto and drug trafficking and terrorism finance were mentioned with Brown claiming, they're using crypto because they know it's a workaround.

They know it's easier to move money in the shadows without safeguards like Know Your Customer Rules and suspicious transaction reporting. Heading into the hearing, there had been a growing sense that the Biden administration is inflating the threat of illicit use of crypto. And during his opening remarks, Republican ranking member Tim Scott addressed the narrative head-on, stating, it feels like digital assets have become the scapegoat of this administration. Last August, we saw 6 billion transferred to the Iranians for, in my opinion, hostage release. None of that's happening in digital assets. They're literally using our cash.

Having a discussion simply and exclusively about digital assets is missing the elephant in the room. Every single time, we make it easier for the Iranian regime to receive resources from the United States and pallets of cash, we put more and more Americans in our allies in harm's way. For us to have a conversation about digital assets, as opposed to a conversation about illicit financing that is far larger than digital assets makes it into a scapegoat. Importantly, Scott is far from a soft touch on this issue overall. He is currently pushing for legislation to more severely restrict Iran's access to the financial system and global trade. His point was simply that illicit crypto finance is an insignificant part of a much bigger picture. In response

to this commentary, Adyamo noted that all of the payments listed by Scott were tied up in financial institutions, with the Treasury able to limit Iran's use of those funds. He said he was simply asking for the power to do the same with digital assets. Scott found this position, in his words, preposterous. He explained to the Treasury Undersecretary that money is fungible and the U.S. should be more focused on the billions of dollars in funding that Iran receives through the financial system. Scott noted that despite a host of illicit finance issues over recent years, the Treasury has has only made one legislative request which was solely focused on crypto. This discussion was really the crux of the issue. The currently proposed legislation to deal with illicit finance

in crypto has been called unworkable by industry figures. It would put KYC and suspiciously activity reporting requirements on the infrastructure layer, applying it to validators and wallets. The question is whether these measures are truly necessary or whether existing powers are sufficient. During the hearing, Adyamo discussed the large number of enforcement measures already undertaken by the Treasury. He mentioned sanctioning multiple crypto mixers as well as the Binance crackdown. Remaining issues appear to be mostly to do with foreign crypto exchanges who do not acknowledge the Treasury's international jurisdiction. In order to grapple with this lack of international power, the Treasury is asking for crypto infrastructure to be forced into practically impossible

compliance measures. Taking her position to a new level, Elizabeth Warren presented a bizarre scenario. She suggested that we know that Iran, quote, makes millions of dollars validating transactions for others. Warren claimed that if she sent a crypto transaction, Iran could pocket the fee. Ariyamo agreed with this premise. Warren claimed that as the crypto market grows, Iran and other threat actors will benefit more and more. This is the first time we've heard this claim from Warren that Iran is, quote, making millions of dollars validating crypto transactions for Americans and for everyone else because we don't have the right anti-money laundering

rules in place. His claim seems to, as is her want, have been presented completely without evidence. There's no reporting that suggests that Iran operates cryptovalidators at any serious scale. Republican Tom Tillis presented the other side of the argument, making the case for passing workable crypto regulation as soon as possible. He said, one thing I'd tell people in crypto or digital asset space that say nothing to see here, everything is fine, they're wrong. There needs to be some light regulatory regime put into place, otherwise there are risks. We want to create the most hospitable environment for digital assets to thrive. We don't want to overreach and lose the opportunity to be that jurisdiction. Those warn that if November's election hands control of Congress to the

Republicans, the view on how to regulate crypto will be, quote, vastly different. Hello, breakers. Today's episode is sponsored by Ledger. As another cycle ramps up, it's another chance to think about your Bitcoin custody best practices, and of course, to help all the new folks do the same. Ledger is the global platform for securing Bitcoin and other crypto. Ledger combines both hardware wallets and the Ledger Live app to offer the best way to buy, sell, swap, and stake without sacrificing on security or self-custody. Ledger features cutting-edge technology in the form of a certified secure chip and a proprietary operating system, but also brings ease of use.

This makes Ledger a safe and secure way to manage your digital assets without all the stress. Check out the link to the Bitcoin Ledger Nano in the show notes. 5% of all sales of the Bitcoin Ledger Nano go to support Bitcoin development. Thanks once again to Ledger for supporting the breakdown. Overall, this hearing was probably the last opportunity for the Treasury to make the case that these new powers are necessary prior to the election. While a handful of Democrats are in favor, most senators appeared skeptical that the new powers were required. They were either critical of a lack of success in cracking down on illicit finance in other areas, or question

the wisdom of focusing on crypto when there are other more glaring issues. Both sides of Congress clearly recognize illicit finance as a big problem, however, there's a growing sense that cracking down on crypto won't make much of a difference in tackling that very real threat. Taking a step up to the meta discussion, I wanted to share a tweet from Jake Chervinsky, the chief legal officer at Variant Fund. He tweeted, I remember when congressional hearings about crypto were major news events. Everyone tuned in to hear what Congress had to say and what laws it might pass. Now these hearings barely register. Everyone knows it's all talking points, no action. Did you know there was one today?

And I think that's absolutely true. Now, of course, another part of that is simply the fact that now that we're back in a bull market, there's more to pay attention to. And so perhaps this always would have been the case. But it still does, feel like the anti-crypto-muman is losing some amount of momentum. Following the hearing, Tom Tillis and Bill Haggerty introduced a new discussion draft bill on illicit financing crypto. Tillis said the bill is about right-sizing Congress's approach, again, his words, ensuring that legislation, quote, does not provide a license for heavy-handed regulatory-obsessed lawmakers to regulate an entire industry into oblivion. The bill ensures that crypto firms are required to comply with

the Bank Secrecy Act, but stops short of applying those requirements to crypto infrastructure. It also clarifies that the Treasury has the power to use its existing tools on crypto transactions and institutions, addressing one of the agency's less onerous requests. Senator Cynthia Lummis wasn't present at yesterday's hearing but made an appearance at the Bitcoin Policy Summit being held alongside in Washington. She gave her views on how the attitude towards crypto is evolving in Congress as the election approaches. Lemmiss said, In this administration, there are a number of high-ranking policy positions that are held by people who are threatened by Bitcoin because they know they can't control it. They know it's decentralized,

they know its potential. These are people, she added, who are so wedded to the idea of the government being in control of money, how it's spent, how it's used, that they find it threatening that something exists that they can't control. In her view then, this means that Congress is, quote, trying to view it as a negative and foresee how we should regulate the negative side of it. Lemus listed a range of policy overreaches, stating, it's really based on this administration's fear of things they can't control. Lemus touched on the impact of crypto policy at the ballot box with a focus on Sherrod Brown's tightly contested seat. She said, the banking committee is kind of the obstacle. You've got a blockchain entrepreneur running as a Republican against the sitting chairman of the

banking committee, who seems to have Elizabeth Warren whispering in his ear about this topic. Lummus urged industry supporters to attend public forums as the campaign ramps up to force the candidates to go on the record about crypto policy. Turning the progress that Bitcoin policy is making in Washington, Lummus discussed mining, stating, essentially we look at Bitcoin mining in two ways. There's grid stabilization, utility scale, and then there's energy harvesting. These energy harvesting use cases like methane capture, she said, get capital excited about the energy use of Bitcoin and how it can be positive versus viewed as parasitic. Dennis Porter, the CEO of Satoshi Action Fund said,

The USA is on the path to becoming the most pro-Bitcoin nation in the world. Things are changing. You can feel it. Lawmakers across the country and in D.C. understand the U.S. can and must advance and adopt Bitcoin. Even nations cannot resist Bitcoin's powerful incentives. Earlier in the day, Senator Elizabeth Warren had circulated a letter to House Financial Services Committee leaders Patrick McHenry and Maxine Waters to warn of the dangers of

stable coins. Warren wrote, efforts to create new regulatory frameworks around the $157 billion stablecoin market, including those that aim to fold stablecoins deeper into the banking sector, could amplify and entrench these risks rather than mitigate them. Turning the alarmism all the way up, Warren continued, I urge you to remember the gravity of these risks as your committee considers proposals to regulate stablecoins

and avoid introducing stablecoin legislation that holds the potential of unleashing another financial crisis. For the substantive points in the letter, Warren made claims that the use of stablecoins in illicit finance is increasing and has now surpassed Bitcoin. She leaned on Chain Alice's research for this fact, but failed to mention that the same report had claimed that illicit transactions fell last year to only 0.34% of activity on crypto networks. Warren also used last year's USDC depegging event to demonstrate the financial stability risk of stablecoins. Of course, many believe that Warren herself helped fuel the banking failures, which caused the depeg, with her letters about crypto risk in the banking sector.

This new letter could signal that any stablecoin legislation would have trouble meeting Warren's approval. It's difficult, however, to say how widespread that view is in the Senate. Alexander Greve, the head of government affairs at Paradigm tweeted, as a meta point, typically when members have opinions about other members' bill, they share them directly or via staff, rather than through performative letters they, quote, exclusively give to Politico to run in a morning newsletter. At the same time, speaking at the Bitcoin Policy Summit, Patrick McHenry said he still has hopes that Stablecoin legislation would be passed this year. The outgoing House Financial Services Committee chairman has been negotiating this bill for over a year. During his final months in Congress,

McHenry said, my hope is to get policy enacted into law. I think we can get our stablecoin policy set through and signed into law. That will be the first sign there is hope and that there is bipartisanship when it comes to this world of digital assets. Moving to broader issues, McHenry added, I believe we can create some level of clarity by a definition which would then codify a property right that all of you know to be true. But we need to have federal law to find it correctly and ensure that your property is protected. As he was speaking at the Bitcoin event, McHenry gave some added detail on why he cares about fighting for the digital asset industry, stating, what Satoshi brought into this world has been unstoppable. Every regime that has tried to shut it down

has failed. Even the Chinese Communist Party that tried to shut down Bitcoin couldn't. I'm trying to convince policymakers on the hill to embrace and for the United States to be leaders in rather than fall behind. He noted that this education process has been easier for some than others, adding, they just took the time to read Satoshi's white paper. It's a much easier conversation. That willfulness to not educate themselves leads down rabbit holes of misinformation. Ultimately, if Congress can deliver clarity for digital assets this year, McHenry said it would be, quote, the biggest win of my 20 years in Congress. So, friends, that is the story when it comes to politics and crypto. Like I said, it is really notable to me how much less of a dent this is making in the public discourse than it

would have even six months ago. I really do think it is a combination of factors. One, like I said, just the simple turning of the cycle, of course, but also just the fact that it's the same story we've heard over and over. I don't think there's anyone right now who believes that anything is moving, or likely to move in any meaningful way, and so why pay attention when everyone just says the same things over and over again? Still in the meantime, the industry continues to evolve, new allies continue to be recruited, and the pipe dream that some in Washington had of shutting this whole thing down gets farther and farther away. That is going to do it for today's breakdown. Big thank you, as always, to my sponsor for today's show. Check out the Ledger Bitcoin Orange Nano. Get 5% of your

purchase will go to support Bitcoin development. Until next time, be safe and take care of each other. Peace.