The Breakdown - Are Gary Gensler's Crypto Battles Crossing Into Mainstream Politics?

Starting point is 00:00:00 A few things to note here. First, one which we won't dwell on is that the tone of the piece is incredibly patronizing. It could not be clear that to Gensler, Crypto is a bunch of impudent children trying to get away with sneaking candy in his candy shop. This is, of course, ultimately not that relevant. The law doesn't really care about the tone of voice people use to describe the law. However, to the extent that there is an objective to have a positive relationship between government and growth industries, this ain't the way to do it. 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.

Starting point is 00:00:38 The breakdown is sponsored by nexus.com, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, August 23rd, and today we are looking at SEC Chair Gary Gensler's latest missive with regard to crypto. Before we get into that, however, if you are enjoying the break. 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. Also a disclosure as always. In addition to them being a sponsor of the show, I also work with FTX. All right, guys, today we are looking at some recent regulatory bluster and ask whether it actually might be crossing into the mainstream of politics in America in some way.

Starting point is 00:01:25 But before we dive into that, let's take a look at markets for a moment. We are in what is classically one of the quietest times of the year in markets in general. This is the end of the month where all the hedge funders and Wall Street traders are in the Hamptons or off vacationing somewhere. Volume tends to be low and in general things tend to be quiet. In many ways, the biggest event this week is the Federal Reserve's Jackson Hole Conference. This is an annual event where they bring together central bankers from numerous parts of the world, and where they tend to signal how they're seeing monetary policy evolve in the future. We'll spend a little bit of time later in this week on the speculation that's starting around what we might hear from that event,

Starting point is 00:02:05 but for now let's keep it to crypto and see if things are as quiet as they are elsewhere. From a market perspective, it's been a bit of a rough week. Friday's crypto drawdown saw the largest liquidation event since June. Bitcoin traders suffered $210 million worth of long liquidations. After trading sideways all week, Bitcoin fell from $23,000 to blizzard. low 21,000 on Friday. The total crypto market cap fell by around $112 billion, temporarily dipping under the trillion dollar mark. In total over the last seven days, Bitcoin is down around 10%, and Eath is down around 12%. Now today, things have rebounded slightly, and we're

Starting point is 00:02:41 back over that $1 trillion total market cap, but we'll see if that sticks. It's also important to keep in mind that volumes are small right now. Coin shares crypto fund report for last week showed minor outflows of $9 million, as well as another drop in trading volume to only $1 billion, which is the second lowest weekly volume seen this year. Bitcoin investment products saw their third straight week of outflows with around $15 million in outflows, and Ethereum funds saw slight inflows of $2.9 million. Speaking of Ethereum, there is obviously a ton of energy and attention right now on the merge. And from a trading perspective, it, like everything else, has been a little confused.

Starting point is 00:03:18 As CoinDesk puts it, with the merge now approaching, expected next month, The market narrative keeps twisting. Ethereum's price decline last week brought with it a large decline in open interest on derivatives. Then yesterday, however, when the price dipped briefly below 1600, there was a spike back up in that open interest. Data provider Kiko wrote, When combined with the spike in open interest we observed this morning, it seems these new positions in ETH futures are biased long and investors are bullish at these price levels.

Starting point is 00:03:45 One thing that's for sure is that whether the trades are bearish or bullish, the merged trade is firmly in the driver's seat. Ether's share of the weekly combined trading volume of Bitcoin and Ether hit 57%, which is the highest since 2018. We're definitely due for a show discussing merge things. Two big, interesting topics stand out. One is the implications for a potential proof-of-work fork, and the second is what the move to proof-of-stake means in terms of the potential for base layer censorship requests from

Starting point is 00:04:12 bodies like OFAC, which maintains the sanctions list. But for today, we're going to start with an op-ed from SEC Chair-Gare Gary Gensler from Friday. The theme of the piece was that the SEC treats crypto the same as all other U.S. capital markets. It was in many ways an extension of Gensler's. If it looks like a duck and quacks like a duck, it is a duck doctrine. The chairman argued in the piece that crypto lending was regulated, but that platforms weren't abiding by regulations. Quote, we can disperse with the idea that crypto lending isn't subject to regulation. On the contrary, the rules have been around for decades. The platforms aren't following them. He stated that noncompliance.

Starting point is 00:04:49 is not inevitable, but that, quote, it is as if these platforms are saying they have a choice, or even worse, saying catch us if you can. The piece essentially argued that securities laws were general and applied to all investment schemes regardless of the type of asset used to facilitate them, that the economic realities of the financial product being offered are what's important. He once again reiterated his call for crypto institutions to, quote, come in and register, and suggested that this would be a path forward in that compliance with securities laws would benefit investors and the crypto market. A few things to note here. First, one which we won't dwell on is that the tone of the piece is incredibly patronizing.

Starting point is 00:05:24 It could not be clear that to Gensler, Crypto is a bunch of impudent children trying to get away with sneaking candy in his candy shop. This is, of course, ultimately not that relevant. The law doesn't really care about the tone of voice people use to describe the law. However, to the extent that there is an objective to have a positive relationship between government and growth industries, this ain't the way to do it. And to be clear, this has been his tone since the day he was sworn in. Second, the entire narrative convention of the piece, one which he's used before, is comparing securities registration to seatbelt laws. Here's the setup.

Starting point is 00:05:56 What do car manufacturers have to do with crypto lending platforms? Consumers and investors deserve protection. That's true of motor vehicles and investment vehicles alike. In September 1966, President Lyndon B. Johnson signed the National Traffic and Motor Vehicle Safety Act. Nearly six decades later, seatbelts and other basic safety features remain standard. That's true despite many innovations in automotive technology. Whether a car runs on gasoline or electricity, drivers and passengers deserve to be protected.

Starting point is 00:06:22 Simple, right? Except that simple explanation actually belies incredible legal complexity and practice. Today, there are dozens and dozens of seatbelt laws across all states with small but significant differences. 34 states, D.C., Puerto Rico, and four territories have primary seatbelt laws, which each apply to different age groups based on the state. 15 states have secondary seatbelt laws. In short, it's a complicated weird mixture of rules that is constantly changing. A third note from the piece is that ultimately, Genzer's argument is that all crypto is self-evidently securities based on previous standards like the Howie Test. This is clearly another argument for that sort of thinking.

Starting point is 00:06:58 It makes sense, frankly, that he's pushing this narrative harder now. Given that every week that goes on, it seems, there are countervailing positions that make it into proposed legislation in D.C. Remember, there is a new concept of ancillary assets floating around thanks to Lumas-Jillabrand, an ancillary asset being ultimately a commodity that has security-like properties at the beginning of its life. Perhaps to be expected, crypto Twitter took Gary to task.

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Starting point is 00:08:52 FNFTs. When you trade NFTs on FTCX, you pay no gas fees. Download the FTCX app today and use referral code breakdown to support the show. In response to Gensler's tweet that, quote, there's no reason to treat the crypto market differently from the rest of the capital markets, just because it uses a different technology. Kobe replied, sounds good, spot ETF then. Mark Cuban took to task the whole come in and talk to us argument. Come in and talk to who? Set up an appointment how? You're using Callingly these days? Since you understand, crypto lending and finances, why don't you just publish bright line guidelines you would like to see and open it up for comments? This idea of a regulatory process that involves articulation in an open

Starting point is 00:09:34 comment period was also the key point of Hermine Wong who runs policy at Coinbase. She gets more specific about what the industry actually wants to see. With all due respect, Chair Gensler, regulation by op-ed still is not regulation. The public is imploring the SEC for crypto-security's regulations. Coinbase's recent rulemaking petition had over 1,600 people take time out of their day to support the request. To be clear, the public isn't asking the SEC to, quote, treat the crypto market differently from the rest of the capital markets just because it uses a different technology. Rather, treat it just as you treat other capital markets. One, add crypto security's regulations to the SEC's Regflex agenda. Two, propose rules and open them up for public comment.

Starting point is 00:10:17 The rest of the U.S. government is grappling with this new innovation. The White House issued a crypto executive order, other agencies solicited RFCs. The SEC does not serve the public interest by avoiding notice and comment rulemaking or staying silent on how to define and offer crypto securities. On top of this whole argument about the process the SEC is engaged in, there is also an argument just about the wrongness of the SEC's position. As clearly correct as Gensler's assertion that all tokens are securities is to him, J.W. Verrett, an associate professor at George Mason's Law School, and former member of the SEC's Investor Advisory Committee, writes a piece in the Wall Street Journal that points out a fact just as self-evident to those of us in the industry. Quote,

Starting point is 00:10:59 cryptocurrency is so difficult to categorize because many of its variants blur the lines between traditional categories of money, stock, and commodities. Most are a bit of each. Some tokens can be used to store data and serve as a form of payment or an investment all at the same time. The purpose depends on the user's preference. Even if Cryptocurrency developers wanted to register their projects with the SEC. As traditional public companies are required to, they couldn't. They don't have a board, CEO, or CFO to file the requisite paperwork with the commission. Nor do they have proxy voting of shares by mail, which the commission still requires companies provide to shareholders. Consider another facet of crypto that would shock the

Starting point is 00:11:35 drafters of the 1933 Securities Act. Imagine if a bank or stock exchange were run by an autonomous open source computer code that took deposits and process loans. Occasionally the code is modified by a few hundred anonymous coders around the world, who collaborate over the internet to keep it running smoothly. This isn't some science fiction movie. Billions of dollars are deposited and loaned out in this way each day. The combined market capitalization of these decentralized finance developers would be enough to make them the 18th largest bank in the U.S. The point here being, of course, that crypto is complex. It's not just a bunch of investment contracts running around on each other's shoulders with a trench coat and sunglasses. Now, interestingly, while this all seems like pretty significantly

Starting point is 00:12:13 insider baseball stuff to us, the Gensler-led SEC is drawing some conservative ire more broadly politically as well. Part of that has come around ESG-related rules that many conservatives view as overreach, but the crypto piece is getting into that narrative as well. Fox News on Sunday published an op-ed titled Gary Gensler's gross SEC overreach. The targeting of cryptocurrency reveals Gensler's intentions to expand the power of the SEC. Quote, Gensler, President Biden's pick to run an agency intended to focus on stock scammers ripping off the unsuspected, has dived headfirst into crypto like Elliott Ness going after Al Capone. If successful, almost 80 years of U.S. securities laws will be upended within Gensler's first two years as chair. Since Howie, Congress has failed

Starting point is 00:12:56 to pass any new legislation that would directly involve the regulation of crypto. Gensler has used this perceived lack of clarity to unleash a campaign of regulation by enforcement, stretching Howie beyond recognition. When Gensler looks at crypto, he not only sees an opportunity to regulate how the land and service contracts were sold, but an opportunity to regulate the oranges. As a legal theory, it should frighten everyone well beyond the crypto space. With meme stocks attracting leagues of first-time investors and the crash in SPACs, you would think Gensler has too much on his plate to be messing with cryptocurrencies that have traded for over a decade. Yet, he calls crypto the wild west of investing because

Starting point is 00:13:31 digital assets are known to finance illegal activity. But the vast majority of money laundering takes place using the greenback, and there's lots of bad stuff happening on an unregulated internet. Moreover, power grabs seem to be Gensler's thing. His limited public input on SEC rulemaking and expanded the broadest environmental ESG data disclosure requirements ever proposed in the United States. This may advance a progressive social agenda, and it might help him secure a bigger job in the Biden administration. Either way, Gensar's war against crypto might be his most ambitious and dangerous affront

Starting point is 00:14:00 to constitutional norms. So quite clearly, there is a political bias embedded in this op-ed, based on both what it says and where it was published. However, I think that is in and of itself the interesting point. Everything right now, especially heading into midterms, is getting more, not less political. It's interesting to me that we're starting to see things that were largely localized to our industry start to take their place in broader political narratives. Speaking of the designation of securities, another interesting legal battle is brewing.

Starting point is 00:14:32 Nate Chastain, the former product head at NFT Marketplace OpenC has asked the federal court to dismiss insider trading charges against. against him, according to a motion filed on Monday. The motion argues that NFTs cannot be classified as securities or commodities, and claims that this designation is a requirement to prove the wire fraud charges which have been brought against him. The motion also argues that because the Ethereum blockchain is open source and transactions are publicly viewable, the blockchain cannot be used for money laundering. Now, for background, the DOJ indicted chastain in June on charges of wire fraud and money laundering. They alleged that he had used his knowledge of which NFTs were scheduled to

Starting point is 00:15:08 appear on the marketplace's homepage to purchase the assets before they were presented in this way to users. And later, he sold them afterward for a profit. The DOJ called this the, quote, first ever digital asset insider trading scheme when the arrest was made. Effectively, the motion claims that the securities and commodities definition is key to these types of charges, because they are about maintaining the integrity of capital markets specifically, rather than being overly broad and extended to all markets of everything. With regard to this idea that a public movement of money could not possibly be money laundering, the motion writes, as alleged in the indictment, the defendant did nothing more than move money in an obvious and perceptible manner.

Starting point is 00:15:44 The simple and manifest movement of money does not constitute money laundering. Now, when this open-sea case went down, I got a little soapboxy. Basically, my argument was that, hold aside all the legal definitions. There's no way that you can view this activity as ethical. This is a person who not only knew, but had influence on which NFTs were going to be listed, and who then worked hard to obfuscate the fact that he was buying those things before they had what was an inevitable price increase. I thought and still feel that the industry's jump to defend that behavior was insane and not befitting an industry that's trying to do better than traditional finance.

Starting point is 00:16:22 At the same time, though, I said that I hoped Chastain defended himself to the full extent possible under the law, and that there's a difference between ethical considerations and legal precedent. I continue to believe that he should defend himself to the fullest extent of the law, which he certainly seems to be trying to do. I also do believe that right now, legal battles are going to be core to making progress on many of these questions. So it feels much more relevant than just what punishment or not one person is going to experience. It's certainly one that now, based on these types of arguments, I'll be watching even more closely. For now, I want to say thanks again to my sponsors, nexus.io, chainalysis and FTX.

Starting point is 00:17:01 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 assets and enterprises summit or ideas. The event facilitates capital flow and market growth by connecting the digital economy with traditional finance. Join CoinDesk October 18th and 19th in New York City

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The Breakdown - Are Gary Gensler's Crypto Battles Crossing Into Mainstream Politics?

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