The Breakdown - Anti-CBDC Bills Advance in Congress

Episode Date: September 18, 2023

One of the more surprising campaign issues of the 2024 election cycle, opposition to central bank digital currencies, is moving forward in Congress as two bills head for markup this week in the House Financial Services Committee. Also enforcement actions around new the new regulation regime in Hong Kong and Gemini files a response to DCG's-Genesis bankruptcy resolution proposal from last week. 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 Monday, September 18th, and today we are talking about anti-CBDC legislation being advanced. 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 of the show notes or go to bit.ly slash breakdown. pod. Hello, friends, happy Monday. Welcome to another week, another frankly, weirdly quiet week right now. I don't know. There's something out there. There's some bad juju. I guess it could just be another example of this weird period of the cycle that we're in that's sort of past the worst, but definitely

before the good stuff starts again. But I'm not sure. It feels ominous for some reason. But we are not going to dwell on that. Instead, we are going to hop, skip and jump through a number of things that have happened over the last few days, kicking it off with what has become a surprising political issue this election cycle, which is Central Bank Digital Currencies. The House Financial Services Committee will hold a markup section on Wednesday, which will include two bills aimed at preventing the issuance of a U.S. CBDC. The first bill is Tom Emmer's CBDC Anti-surveillance State Act, which would prevent the Federal Reserve from offering any products or services directly to individuals. Fed branches would also be prohibited from keeping accounts for individuals, or

or issuing a CBDC or similar digital assets. Emmer's bill was recently reintroduced during last week's CBDC hearing and now boasts 49 co-sponsors. On September 14th, the House Majority Whip tweeted, A governmental tool for financial surveillance is un-American. We must urgently develop a digital financial system that is, one, open and freely accessible to all, two, without requiring permission from the government or anybody else, and three, private safeguarding the user's identity. In a separate tweet, he had said,

if not open, permissionless, and private, like cash, a CBDC is nothing more than a CCP-style surveillance tool that can be weaponized to oppress the American way of life. Now, the second bill is sponsored by Alex Mooney and is called the Digital Dollar Pilot Prevention Act. That bill is structured as an amendment of the Federal Reserve Act of 1913 that would prevent Federal Reserve branches from even conducting CBDC testing and development. Now, of course, senior Fed officials have gone on the record to say they have no plans to issue a CBDC without the approval of Congress. In May, Minneapolis Fed President Neil Kashkari even questioned the need for a CBDC given the existence of instant payment fintech services. He noted that CBDCs would be a powerful financial surveillance tool and could enforce

negative interest rates, but questioned why the U.S. government would have any interest in constructing such a system. Now, all that said, some Fed branches still do seem to be interested in the development of CBDC technology. The San Francisco Fed, for example, recently advertised a position for a crypto architect for a CBDC project, and Project Hamilton was concluded and wound down in December after two years of collaboration between the Boston Fed and MIT. Now, in terms of where this legislation actually is, the markup process allows committee members to comment on the drafting of bills. A vote is then taken on whether or not to approve legislation for a full House vote. Both bills are only a few paragraphs long, so shouldn't drag out to an all-day contested affair, as we recently saw with

the stablecoin bill. Instead, the bills could act as a bellwether for congressional sentiment around CBDCs. Multiple Republican presidential candidates have made opposition to a CBC a part of their campaign. For example, Florida Governor Ron DeSantis said at a July event, if I am president on day one, we will nick central bank digital currency. Done, dead, not happening in this country. Outsideer Democrat candidate Robert F. Kennedy has also been outspoken on the need to oppose the issuance of a CBDC. So given all that, if either of these bills progressed to a vote in the House, they could be an opportunity to put members of Congress on record about their support for a CBDC coming into a election season. Now, we could spend shows and shows and shows talking about why this seemingly

small issue, at least to the rest of the world. Obviously, I'm not talking about for our audience and our community. But this issue, which is, for all intents and purposes, very small to most people, has become such a central piece of the opposition narrative heading into this election cycle. I think there are probably a few different elements of it. One, I think it feels to many like an extension of government power. And as we've seen and discussed, it is quite clear that how much power governments have is going to be a major issue. And of course, while that's coming from the Republican side of the House, it's also coming from Democrats. And this is perhaps not surprising. It's not surprising because we're still coming off the COVID period, which brought up major

questions of how much authority the government has to be involved in people's lives. And so in many ways, this is an extension of that conversation. I think there is also a little bit of nervousness around technology in general. This is something that we've seen in crypto. It's certainly something that we see in AI as well. And while this is technology in the hands of the government, not technology in the hands of big tech companies, it still has that feeling of lots of data, lots of power, lots of information, big black holes, and not a clear way for citizens to exert influence when it comes to this important domain of their lives. Anyway, right now, there's no one who's really actively arguing for a CBDC, which could frankly be another

reason why it's a nice political issue. It gets to stay a little bit, at least, in the realm of metaphor for some of these larger topics, but is still something that can be legislated upon with lower stakes than going after government power directly. Anyways, it's one we're going to keep an eye on to to see just to what extent it continues to be an issue in elections, or whether it's just part of this early narrative testing process at this very nascent point in the election cycle. Next up, we go halfway around the world to Hong Kong, where the Hong Kong Monetary Authority has issued a warning to crypto users that unregistered crypto firms could be presenting themselves as banks. The HKMA, which serves as the region's banking regulator, said that firms which

use language associated with the banking industry could be in violation of recently implemented Hong Kong crypto regulations. The regulator said it had become aware of firms using terms including crypto bank and offering quote banking services. They even went so far as to call out firms that use the word deposits or promote their quote savings plans as low risk with high return. The HKMA said in a statement that quote, these descriptions may mislead members of the public into believing that those crypto firms are bank authorized in Hong Kong, to which they can and trust their savings. The regulator noted that these firms advertising themselves as crypto banks were not supervised by the HKMA and are not covered by the region's deposit protection scheme.

Now, Hong Kong's crypto regulations coming into force in June was one of the big stories of this year. The rules were intended to permit retail crypto trading on regulated exchanges, and they're being administered by the local securities agency rather than the banking regulator. Since then, only a small handful of firms have been granted licenses. This includes Hashkey and OSL, who were licensed to provide retail trading exchanges, as well as Swiss-based Crypto Bank Siba, which has received in principle approval to offer over-the-counter derivatives trading and asset management services. Now, enforcement of Hong Kong's crypto regulations has also begun in earnest.

Last Wednesday, the securities regulator issued a warning against Dubai-based crypto exchange JPEX. They alleged the firm had been promoting its products and services in Hong Kong without applying for a license. A press release from the securities regulator included allegations that JPEX were advertising their services using the prohibited terms, deposits, savings, or earnings. They noted that many JPEX products had, quote, suspicious features, including very high returns of around 20% on tether, Bitcoin, and Ethereum balances. The regulator also accused influencers and

local OTC desks of making false and misleading statements on social media that JPEX had applied for licensing. Following the warning, JPEX employees seemingly disappeared from their booth at the Token 2049 conference in Singapore, where they were a platinum sponsor. And on Sunday, the exchange ramped up withdrawal fees to $999, and also implemented $1,000, $1,000,000, withdrawal limits, essentially being a withdrawal halt. Now, JPEX addressed this on Sunday, blaming, quote, unfair treatment by relevant institutions in Hong Kong towards JPEX. They said that, quote, partnered third-party marketmakers have maliciously frozen funds. JPEC said they were currently negotiating with these market makers to resolve liquidity issues. The exchange promised to, quote,

recover liquidity from third-party market makers as soon as possible, and gradually adjust the withdrawal fees back to normal levels. They claim that emergency withdrawals are still being dealt with manually and also announced that trading on their earned trading platform would be halted on Monday. Now, adding something to the story, on Monday, the South China Morning Post reported that local police had received at least 83 complaints about JPEX involving assets worth around 4.3 million. They say the securities regulator had escalated investigations to the Commercial Crime Bureau on suspicions of fraud. Follow-up reporting said that lawyer turned crypto-influencer Joseph Lam Chalk had been arrested on Monday in connection to promotion of the exchange.

Sources also said an office building had been raided on Monday morning. Now, there's a lot that's actually really worth watching here. Hong Kong creating this licensing regime is not just relevant for citizens of Hong Kong, although it certainly is for them. This has been seen rightly so as a marker of slightly shifting Chinese attitudes towards crypto in general. When these rules were first announced as forthcoming at the end of last year, it was widely anticipated that it would include a retail trading ban.

Remember, crypto trading has been banned in China for the last few years. However, in the wake of FTX and in particular, the U.S.'s aggressive response to it, it appeared that the Chinese authorities might be reconsidering their position, and in so doing using Hong Kong as a vehicle for testing the waters on the market without changing any policy in mainland China. In that light, I don't know exactly what this enforcement action around JPEX actually signals. Arresting an influencer certainly sends a signal, but to what the ends of that signal are, I'm just not sure. I do think, however, it's probably worth waiting this issue as a little bit more significant than just a regional crackdown, as it may have bigger implications,

given the unique role Hong Kong plays relative to China when it comes to crypto. Next up, we move back to bankruptcy proceedings in the U.S. where Gemini have slammed the proposed settlement between DCG and their subsidiary Genesis, calling it misleading at best in a court filing on Friday. Now, you'll remember that earlier last week, DCG had filed a proposed deal, which would settle approximately 630 million in outstanding loan payments to Genesis. DCG said the deal could result in 90% recoveries for unsecured creditors,

and recoveries as high as 95 to 110% for Gemini earned customers who form the largest creditor entity in the Genesis bankruptcy. Gemini said in their court filing, however, that, quote, DCG touts proposed recovery rates that are a total mirage, misleading at best and deceptive at worst. Make no mistake, Gemini lenders will not actually receive anything close in real value terms to the proposed recovery rates under the current agreement and principle. End quote. DCG had proposed a repayment schedule for $1.65 billion in total loans over seven years. Although the agreement had a substantial payment in the first year,

criticism of the deal noted that recovery calculations were contingent on crypto-denominated payments becoming more valuable over time. I think the numbers were something like Bitcoin going to $85,000 and Eth going to $8,500. Gemini customers are owed around $1.1 billion, and it appears that taking on long-term risks associated with crypto prices and the continued solvency of DCG are simply not acceptable to them. Gemini said in their filing, quote, receiving a fractional share of interest in principal payments over seven years from an

incredibly risky counterparty is not even remotely equivalent to receiving the actual cash and digital assets owed today by Genesis to the Gemini lenders. They added that, quote, DCG's proposal is markedly parallel to an attempt to satisfy its significant obligations through the issuance of IOUs instead of paying any real cash and digital assets. Gemini lawyers also slammed DCG's negotiation tactics, claiming they had made efforts to wear down creditors, quote, in the hopes that they would become desperate enough to take a significant haircut just to move on. On their creditors' update blog, Gemini put it even more. more pointedly stating that, quote,

DCG is gaslighting creditors and testing earn users resolved by baiting them with false promises of high recoveries. Now, hanging over the current state of the Genesis bankruptcy is the firm's right to exclusively propose recovery plans. The judge had granted a 30-day extension to the exclusivity period through to early next month. That order was contested by Gemini and ended up falling short of the 60-day extension requested by Genesis.

After the exclusivity period has elapsed, creditors will be able to organize their own proposed deal to bring the bankruptcy to a close. Finally, separately on Friday, Gemini updated their lawsuit against DCG and CEO Barry Silbert. They now include four direct allegations that intercompany loans between DCG and Genesis were designed to, quote, make the market believe it had actually fixed Genesis's cratering financial condition. So there you have it. There are a number of other things that happened over the weekend or around the end of last week that we may touch on in conversations later.

Mark Cuban got fished for almost a million bucks, for example. The New York Times leaked parts of a 15,000 words Sam Bangman, Fried Ramble that amounts to a very self-pitying reflection on the state of affairs, and Google's head of Web3 is begging the industry to build something actually useful. For now, though, we are going to wrap it there. We're going to get to the hard work of building back this industry from the ground up. I appreciate you hanging out here with me as we go about that work. So until next time, be safe and take care of each other. Peace.