The Breakdown - Are Regulators Spending Too Much Time on Crypto?

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 nexo.io, Circle, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Friday, October 14th, and today we are catching up on all the DC chatter around crypto. 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. Also a disclosure as always. In addition to them being a sponsor of the show, I also work with

Starting point is 00:00:47 FTX. All right, folks, well, to close out this week, today we are catching up on some of the news and discourse in the crypto space that we missed while discussing inflation yesterday. However, first I want to follow up on those absolutely whipsaw markets. By the time I finished yesterday's show, markets had recovered from their big morning losses, but we didn't really have much of a chance to actually figure out what was going on. So to recap, Thursday's stock market opened saw a violent move down, following the release of September's hot inflation data. The S&P 500 dropped 2.3% in the minutes after the opening bell. From there, however, it bounced hard off the 3,500 level and rallied 4.8% over the next two hours. The index hit a one-year low before closing

Starting point is 00:01:33 at a five-day high, up 2.6%. This made yesterday the fifth largest intraday reversal off a low in the history of the index, moving 5.6% from bottom to top. Sometimes when looking at markets, there is a clear narrative driver for price action that we can easily point to, correctly or incorrectly. Other times, the move is pretty detached from fundamentals or narrative or market sentiment, and this seems to have been the latter. Lizanne Saunders, the chief investment strategist for Charles Schwab had perhaps the simplest version of an explanation. Quote, It's the nature of the beast these days where sometimes you get these intraday big swings.

Starting point is 00:02:10 We can all speculate on what might be behind it. A lot of it has to do, for lack of a better word, with the mechanics of the market, the fact that there's more shorter-term money in the market, there's more money that moves around based on algorithms, quantitative strategies, and at any point you can have triggers that cause a 180 in the middle of the day. By all accounts, institutions were very heavily hedged going into the market open. Some $10 billion worth of put options on individual stocks had been purchased, approaching record high volumes of downside hedges.

Starting point is 00:02:36 During the initial down move, it seemed that a huge amount of these hedges paid off, so positions needed to be quickly unwound and profits taken. This seems to have triggered price action similar to a short squeeze, and once the up move began, momentum traders and algorithms carried the move as far as it would go. Callie Cox from E. Toro wrote a really good little explanation. Excuse me, WTF just happened. So, CBI data released this morning showed we are still in an inflation. crisis. Bad news, right? It really is. This isn't a sustainable environment for anybody. So why did

Starting point is 00:03:05 the market rally? At first, it didn't. The S&P 500 dropped as much as 2.3% in the first few minutes of the day. But at around 9.35 a.m. Eastern, the market took a sharp U-turn and gained almost 5% in three hours. So what happened? One, the market was absolutely braced for pain. The S&P 500 was down six days in a row, which has happened 17 times since 2000. Lots of selling and people are in a bad mood. individual investors had been raising cash recently, per our survey data, and they're the most bearish in decades. This may sound like a bad omen, but fear can actually be a bullish development for markets like we saw today. It's like tensing your stomach up for a punch, and the punch hurting less because you were expecting it. Two, the feeding frenzy. There was a lot of speculation

Starting point is 00:03:48 around this CPI announcement, even if it wasn't so obvious in the typical metrics we watch. Callie goes on to explain what the VIX had done for the past few days, but it's heavily chart-driven, so I'm going to skip over it. Back to her thread. Point is, there was one side of positioning and a lot of it. A bunch of people ran to one side of the boat and then the other super quickly, queue lots of buying and selling with wild price moves. The market is super panicky, people. Yes, we gain two plus percent today, but in the cringiest way possible. And to be honest, there wasn't a good reason for the rebound. It just kind of happened and the crowd fueled it from there. Unfortunately, markets don't always need a good reason to move the way they do,

Starting point is 00:04:23 and they can be irrational well into a market recovery you can't afford to miss. So anyway, super interesting, but something that probably doesn't seem super sustainable. So let's now move over to the crypto side of the world. This week was DC FinTech Week, so there was a ton of commentary about crypto and related themes from non-crypto sources. J.P. Morgan's CEO, Jamie Diamond, took the stage at the Institute for International Finance event in Washington, D.C. on Thursday. And once again, he went on the attack against crypto. He repeated his characterization of crypto tokens as, quote, decentralized Ponzi's that don't do anything. Even adding some juice to that sentiment when he said,

Starting point is 00:04:59 decentralized because it's not like Bernie Madoff doing it, it's people around the world hyping it. He did do his best 2017 impression by moving on to praise blockchain technology. He noted that his bank is utilizing the technology in their onyx wholesale payments platform and saying that it could disintermediate parts of the financial system. Diamond called Bitcoin dirty and expensive, saying that he would never purchase cryptocurrencies that he views as worthless. And so basically that's Diamond in a nutshell. Now, he also spoke about monetary policy, expressing, quote, total faith and trust in Fed Chair Jerome Powell. He predicted that the Fed rate would rise above 4.5% during the fight against inflation,

Starting point is 00:05:35 exceeding at the time the current Fed forecast, and he also said that he does not anticipate a soft landing. Fran, a partner at Plaintex Capital, says, I would really appreciate it if Jamie Diamond would shut up about crypto so that my dad can stop sending me links of him saying crypto is a Ponzi from the financial times. Want to keep more profits when trading? Get the best possible prices and trade with 50% lower fees on Nexo Pro. The new spot and futures trading platform uses aggregated liquidity of over 3,000 order books collected from multiple sources. Utilizing the complete Nexo suite allows you to earn interest and borrow funds as you wait for the next trade setup. Visit pro.nexo.io.

Starting point is 00:06:18 That's p.ro.n.exo.io and sign up today. The breakdown is sponsored by FTX US. FtX US is the safe, regulated way to buy and sell Bitcoin and other digital assets, with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FtXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCX, you pay no gas fees.

Starting point is 00:06:54 Download the FTX app today and use referral code breakdown to support the show. Moving over to Acting Comptroller of the currency, Michael Sue. He told CoinDisk this week that lack of focus from crypto companies is hindering government agency's ability to establish regulatory standards. Quote, part of this confusion is because there are parts of the crypto industry that don't know what they want to be when they grow up. They want to be a little bit of everything to everyone, and at some point you have to decide. He called for crypto companies to more clearly define the products on offer,

Starting point is 00:07:24 delineating customer accounts from trading accounts, for example, noting the failures of companies like Celsius. Quote, if you don't have strong foundations, it doesn't matter what your charter is. The company is not going to scale sustainably. And I know that's a goal. If you want something to scale, play the long game. You've got to have some strong foundations. Sue said the OCC was open to facilitating growth in the industry. If there's ways to control and limit the manner in which growth takes place, we're all ears. What we are allergic to is give me a license and let me do whatever I want. That's not something that's safe and sound. So you also made some really interesting comments that regulatory attention was perhaps not optimally distributed. Speaking with Reuters, he said that the real and present danger to the financial system is the unregulated growth of fintech partnerships, not crypto.

Starting point is 00:08:07 Quote, look, bank fintech partnerships, they're here to stay. I'm not trying to do away with them. This is the future, so let's do the future right. He had discussed this problem earlier in the month as well, saying, my strong sense is that this process, if left to its own devices, is likely to accelerate and expand until there is a severe problem or even a crisis. One of Sue's diagnoses is that the problem is in part a lack of clarity and regulatory oversight. Quote, when everything is done within a bank, we know exactly who is accountable when things break. When you start chopping these things up and the business models are different, that's when risk can get lost. Given this outlook, Sue warned that Congress and regulators were overly focused on crypto. Quote, we're spending too much time on crypto. It's interesting, it has thorny issues, but relative to other technology and banking issues, I think we're now kind of overweight crypto.

Starting point is 00:08:50 Crypto is just occupying a lot of brain space for an awful lot of people, both on Capitol Hill and the regulatory community. The persistence of the occupation of brain space, it's starting to worry me now that we're not spending the time and attention on some other things. FTX CEO Sam Bangman-Freed echoed this sentiment appearing at the IIF event also on Thursday. He said crypto is, quote, not 50% of the world's economic activity right now, but it's a large fraction of the world's economic regulatory conversation right now. Now, this is sort of the first time I've seen this type of discourse among regulators, And of course, it resonates with many of us in the space who see how much intense scrutiny there is on crypto compared to some other areas. Another first-ish type of statement today, Brendan Peterson reported that SEC chair Gary Gensler

Starting point is 00:09:33 speaking at Georgetown this morning about crypto regulation, says he would support changes that would give the CFTC greater authority in the space. He says the CFTC should have more plenary authority when it comes to rulemaking around exchanges. Nick D from CoinDesk said, think this is the first time he's gone so far as to say the CFTC should have plenary authority, though not sure this answers the question of what that might look like in the first place. The block added a few more details.

Starting point is 00:09:56 Genzer told an audience from Georgetown's Financial Markets Quality Conference in Washington, quote, I think the CFTC could well have greater authorities. They currently do not have direct regulatory authorities over the underlying non-security tokens. Genzer also added, quote, you can count on the fingers of a hand or two the products that don't fall under the SEC's jurisdiction. Genzer's support for broadening the CFTC's authority follows a recommendation from the Financial Stability Oversight Council, a supercommittee of U.S. regulators, which also made a similar recommendation in a unanimous vote. Now, greater CFTC leadership has been a preferred approach of the

Starting point is 00:10:28 crypto industry until recently when the CFTC came under scrutiny for their decision to go after a Dow. Jarrett Seaberg, and analysts with Cowan, citing the Okie Dow action said, quote, the CFTC is pushing its legal authority. It confirms our view that the agency would be a tough regulator if Congress makes its lead on crypto. Paul McCaffrey, the head of alternative capital sales at Investment Bank, Keith Brea and Woods said, I do worry about the political jockeying for power ahead of the decision by Congress. The desire to one-up each other to show who's the Tuver regulator.

Starting point is 00:10:56 It disappoints me that the CFTC opted for the SEC rule-by-enforcement playbook. Hopefully we see a legitimate process going forward and less splashy grandstanding, which is what I think this Kim Kardashian settlement was with Gensler. Coindesk published a piece earlier this month called US CFTC as Crypto's regulatory savior, crypto firms might not like what they get. The Securities and Exchange Commission is treated as a villain in crypto,

Starting point is 00:11:17 but the view of the Commodity Futures Trading Commission as a government ally may not survive the honeymoon, insiders suggest. Basically, the argument of the piece is just that any regulator, including the CFTC, is still going to support pretty significant enforcement actions. It's not so much saying that the CFTC is bad, it's more just that it's saying that it would be a mistake to think that any regulator is fully aligned with the average crypto industry's person's ideal agenda. Staying on the topic of the SEC, however, U.S. Senator John Hickenlooper has become the first Democrat to publicly criticize SEC Chair Gary Gensler's approach to crypto regulation. In a letter to the chairman on Thursday, the Senator for Colorado said that the lack of a coordinated regulatory framework, quote,

Starting point is 00:11:55 creates uneven enforcement and deprives investors of a clear understanding of how they are protected from fraud, manipulation, and abuse. He criticized the misapplication of existing regulation rather than establishing new guidance. Quote, at the same time, as you have repeatedly noted, existing securities regulation does not cleanly apply. Applying the old rules to the new market could inadvertently cause financial services to be more expensive, less accessible, and the SEC's disclosure regime to be less useful to the American people. Hickenlooper called for the SEC to clarify which digital assets are securities, explain how they should be issued and registered, and determine which disclosures are necessary to inform investors. He suggested that the SEC should establish a

Starting point is 00:12:32 registration regime for trading platforms and set out rules for trading and custody products. Quote, I recognize these questions are complicated, but it is time for the SEC to engage, empowering innovators fostering financial innovation, protecting investors and ensuring market integrity are consistent principles. A notice in comment period will yield critical public input and enable the SEC to put forward rules that effectively protect investors while supporting responsible innovation. Public input is critical to effectively synthesizing these principles into prudent regulations. There were, as you might imagine, lots of support for the comments on Twitter. Alexander Greve, who does crypto and fintech policy at Tiger Hill Partners, said,

Starting point is 00:13:09 this is particularly noteworthy, as this is the first time a Senate Democrat has come out and criticize the SEC for regulation by enforcement. When Republicans, Democrats, Jamie Diamond, and Matt Levine, I'll call attention to something. Maybe time to do something about it. Congressional letters are an important tool for, one, signaling to regulators the stance of congressional members on key committees of oversight or industry jurisdiction. Two, signaling to the public and industry issues of importance or that were in intention. Three, creating a public record that can be referred back to publicly in hearings or further letters should the recipient do or not do something of reference to letter subject. Four, assisting a congressional officer committee and key

Starting point is 00:13:43 fact-finding that may influence later legislation. Chongvi Lee, the partner in head of regulatory and policy affairs at Bain Capital, wrote, back in 2017, when I started working on crypto at the SEC, we mostly saw ICOs that look like IPOs, team selling tokens to the public to raise money to build protocols or apps that didn't exist yet, with little to no disclosure so the public could know what they were getting into. While some argue that these were never investment contracts, what's undeniable now is how far crypto has come. It's a diverse and vibrant ecosystem of actively used protocols, layers, apps, and DAOs, and tokens can have different purposes, utility and functionality. If viewing all of this through a securities lens ever made sense, it sure doesn't now.

Starting point is 00:14:19 Sturvenly clinging to the Howey test just because some people buy tokens for speculative purposes, both ignores how far crypto has come, and threatens the future of this incredible new technology. Julie Stitzel, the VP of Public Policy at DCG, says, Rule by enforcement diminishes trust between the public and private sectors at a time when collaboration among policymakers and digital asset firms is critical. Regulatory clarity achieved through a fair and transparent process will help digital assets thrive in the U.S. Now, obviously, the notable thing here might be that a Democrat is pivoting to criticize Gensler.

Starting point is 00:14:51 Hickenlooper is a junior senator, so you have to take this criticism with a grain of salt, but still it's a notable moment. Finally, on the topic of regulatory hot buttons, Tether yesterday tweeted this announcement. Breaking. Tether is proud to announce that we have completely eliminated commercial paper from our reserves. This is evidence of our commitment to back our tokens with the most secure liquid reserves in the market. Tether has eliminated over $30 billion of commercial paper without any losses, a proof of how Tether's reserves are conservatively and professionally managed. Tether has also increased its direct exposure to U.S. Treasuries by more than 10 billion in the last

Starting point is 00:15:23 quarter. This announcement further ensures that Tether has a diversified portfolio with limits to exposure to higher risk assets. It demonstrates Tether's commitment to lead by a example, as part of our ongoing push toward increased transparency for the stable coin industry. Now, for a while, this was one of the big questions around Tether. Whose debt was on their books in the form of this commercial paper? Tether being the lightning rod that it is, when Chinese commercial property developers like Evergrands started to look shaky, people even asked if Tether had exposure to that debt. Gabor Gopax from Vanek said, Tether slashes commercial paper to zero. Tether went from $30 billion in commercial paper to zero. The current T bill and short-term fixed income

Starting point is 00:16:00 portfolio backing USDT reserves looks less risky to me than most bank balance sheets. Well done, Tether team. Alastair Millenney says plot twist. Tether becomes such a big holder of U.S. government debt that they are systemically important, forcing regulators to tread carefully. Now, a note on that. According to the press release, Tether now has 40 billion in direct exposure to T-bills. That's about as much as the UAE or Chile, but well short of a major nation. U.S. commercial banks have around 4.6 trillion in aggregate, with 1.19 trillion in the eight globalities system. important banks back in 2020. J.P. Morgan, for example, was at $370 billion in Treasury exposure in in December 2020. So while it may not be the case that Tether is systematically important yet,

Starting point is 00:16:41 that $40 billion in exposure is certainly not nothing. So there you have it. That is the crypto world as I see it on this autumn Friday. For now, I want to say thanks again to my sponsors, nexo.io, circle 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. Join CoinDesk October 18th and 19th in New York City for a 360-degree investment experience, where you can source, invest, and secure the next big deal in digital assets. Use code breakdown 20 for 20% off a general pass. You can register today at

Starting point is 00:17:29 coindesk.com slash ideas.

The Breakdown - Are Regulators Spending Too Much Time on Crypto?

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