The Breakdown - Are We Finally Going to Get Securities Clarity?

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. What's going on, guys? It is Thursday, March 27th, and today we are talking about some big movement on crypto policy in D.C. 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. We're going to bit.ly slash breakdown pod. All right, friends. Well, like I said, we have some movement on crypto policy. We have the market structure bill to be reintroduced soon. We have a new bill called the Securities Clarity Act. We've got some comments from Senator Kirsten Gillibrand on stable coins, news out of Wyoming

Starting point is 00:00:56 on their own stable coin. Let's start, though, with the market structure bill, as this is more of a coming soon than an actual announcement, House Financial Services Committee Chair French Hill has alluded to a new draft of the crypto market structure bill coming very soon. Speaking at the DC Blockchain Summit yesterday, Hill said that he has taken technical assistance and that the revised draft would be published in the next few weeks. Passing this market structure bill is viewed as a more difficult task than getting stable coin legislation on the books. A version of the bill known as Fit 21 was passed by a bipartisan majority in the House last year. However, many industry figures think that version

Starting point is 00:01:30 has some glaring issues, leaving far too much to the discretion of regulators rather than providing certainty. Fit 21 was negotiated over the past two years and included a lot of compromises to the prevailing Democrat position on crypto at the time, which is, of course, a lot less politically relevant now. Hill and other lawmakers have been working on an update for months, so have hopefully ironed out some of those perceived issues. Meanwhile, stable coin legislation continues to move through Congress at a rapid clip. The Senate version of the bill was passed out of the banking committee earlier this month, so is now eligible for a floor vote. The full text of the House version was introduced on Wednesday. Bill sponsor Brian Steele said that the House bill will go to committee

Starting point is 00:02:06 markup in the very near future and stated that the two bills are, quote, roughly 80% similar. The differences involve some nuances around a state pathway for stable coin issuers and the role of the OCC as a stable coin regulator. Steel said that he expects to have discussions with the Senate to come to close the gap on those issues. He commented, we now have a very different political landscape. We maintain a very pro-crypto House of Representatives and really good working relationships with the number of Democrats. What's more, according to Steele, the situation in the Senate, is very similar. It feels, fingers crossed that this is one of those rare moments in Washington where Congress is actually working to pass legislation quickly. Steele commented, all of us,

Starting point is 00:02:43 meaning the administration, the House, and the Senate, all of us share a very unified goal of getting legislative text, ultimately all the way across the line. Another bill in the news is that representatives Tom Emmer and Darren Soto have reintroduced their Securities Clarity Act. This is a slim-line version of the crypto market structure bill focused solely on defining which tokens should be considered securities. Emmer said in the statement, until we have a clear definition of what is a commodity and what is a security, American innovation will continue to suffer. Entrepreneurs need clarity to calculate risk accurately, create new investment opportunities, and grow our economy. So the bill functions by clarifying that investment contracts are separate and distinct

Starting point is 00:03:20 from the assets created as a result. Essentially, it codifies that most crypto tokens are not securities when they are sold in the secondary market. Peter Van Valkenberg, the executive director of Coin Center, called the bill a, quote, tech-neutral, common-sense way to clarify the otherwise overbroad authority of the SEC. He added, This is the smartest approach we have seen to provide clarity about how securities law applies to digital assets.

Starting point is 00:03:42 Ron Hammond, the Senior Director of Government Relations at the Blockchain Association, said that this bill could serve as a, quote, bipartisan precursor to a more thorough market structure bill. He could represent a narrow proposal that Emmer and Soto are attempting to be incorporated into the full legislation, or it could function as a fallback option if a consensus can't be reached on a fleshed-out market structure bill entirely. The security's definition is probably the number one legal issue for the industry, so getting it resolved as a central priority. Hammond also noted that crypto remains one of the few bipartisan issues in this Congress. Yesterday, the Senate held

Starting point is 00:04:13 their second role to repeal the IRS broker rule, which was required for procedural reasons. It again passed with bipartisan support and is now on its way to the president's desk. Hammond wrote, I don't want to hear anyone call Cryptopartisan because the first crypto bill that will be signed by a U.S. President will have the support of over two-thirds of Congress. Today's episode is brought to you by Crypto Tax Calculator. If you're looking for accurate crypto taxes with no guesswork, check out Crypto Tax Calculator. Get accurate CPA-endorsed tax reports with full support for IRS rules. For those who have fallen down the on-chain rabbit hole, CTC has you covered with more than 3,000 integrations. They have full support for Defi, staking, and NFRs. import directly to TurboTax or H&R block or share securely with your accountant. Create an account, import your sources, and review. It's that easy. Hello, friends. I am thrilled to share that Ledger is once again partnering and sponsoring with

Starting point is 00:05:08 the breakdown. Many of you know, but for those of you who don't, Ledger is the most secure hardware wallet for your crypto and logins. It's trusted by 7 million users and secures 20% of the world's digital assets. What's more, Ledger is a lot more than wallets. Over the recent years, they've built a comprehensive ecosystem of products and services, all of which are designed to make digital ownership more secure and accessible. You can buy your Bitcoin with Ledger and Ledger Live, and so much more. Basically, not only did they want to keep your assets secure, they want you to be able to do more with them. Ledger's newest devices, the Ledger Stacks and Ledger Flex, introduced the world's first secure touchscreens, making it easier and safer to manage your

Starting point is 00:05:44 transactions and assets. Alongside Ledger Stacks and Ledger Flex, the company also launched the Ledger Security Key app, offering a safer alternative to traditional passwords and enhancing your digital security. If you are in this space, you owe it to yourself to at least check out Ledger and their ecosystem what they have available to you. So thanks, once again, to Ledger for sponsoring the show. Now, moving over to Stablecoins, where legislation is expected this year, some interesting comments from Senator Kirsten Gillibrand. Once again, also speaking at the DC Blockchain Summit, the New York Democrat warned that allowing interest to be paid on Stablecoin holdings could undermine the banking industry. She said,

Starting point is 00:06:19 Do you want a stablecoin issuer to be able to issue interest? Probably not. Because if they're issuing interest, there is no reason to put your money in a local bank. If there's no reason to put your money in a local bank, who's going to give you a mortgage? If there's no deposit, small banks cannot do that anymore. It will collapse the financial services system that people rely on for their businesses and mortgages. Similar points have been made around the introduction of the digital euro and the EU, with the banking lobby insisting on tiny wallet limits and zero interest. For our purposes today, we won't get into whether banks are entitled to cheap funding from deposits or whether the mortgage industry still operates actually by lending money from everyday account holders

Starting point is 00:06:55 given widespread securitization. There's also the point that money market funds already exist and their main effect has been to force small banks to compete for deposits. But the argument still is worthwhile to note because Senator Gillibrand is the lead Democrat sponsor on the stablecoin bill. Up until this point, it didn't seem like the industry would need to fight to offer yield-bearing stable coins in the U.S., but clearly this is now a lot. up for debate. More generally, Gillibrand seems to be thinking about all the ways in which the first

Starting point is 00:07:20 U.S. regulated stablecoins could go wrong. She warned that, do not think that a watered down stablecoin bill will help your industry. It will destroy your industry, because one more SVB, one more algorithmic stablecoin collapse, just continues to create such uncertainty that nobody wants to do business in the United States. You have to think through she continued all the ways this can go wrong. Something as simple as how you define a dollar. Is a treasury the same as a dollar? What happens if your one-to-one backing is all in treasuries, and you have an interest rate misalignment just like SVB just did? Then you have a run on your stablecoin and all your dollar-to-dollar backing is in a three-month

Starting point is 00:07:52 treasury you can't get out of. That's a run on your stablecoin, that's a collapse. Jillibrand conflated an impairment of stablecoin reserves with the FTX collapse and algorithmic stablecoin failures, which I'm not entirely sure is a fair comparison. Both USDC and Tether have had reserve issues and runs over the years and each time they've recovered, and obviously those events feel categorically different to an FTX or a Luna. The comments highlight, though, that there are still a ton of scar tissue around financial crises, both in and outside of crypto, that will be read into this bill.

Starting point is 00:08:20 Everyone in Washington remembers when a major money market fund broke the buck in 2008 and contributed to the panic of the moment. Most unfortunately failed to recognize that regulations have dramatically changed since then. That fund was holding Lehman Brothers corporate paper as part of their collateral, not keeping their reserves exclusively in safe and liquid treasuries. Realistically, if a stablecoin reserve can't liquidate three-month U.S. treasuries to meet redemptions, then we probably have far bigger things to worry about. Honestly, these comments are a little strange coming from Senator Gillibrand.

Starting point is 00:08:48 She has been one of the champions of common sense regulation, and a lot of this feels a little bit more like its talking points from the banking lobby. The optimistic greed is that this is a person who has spent a lot of time in political capital being deeply engaged in the crypto issue, and now that we're on the one-yard line really wants to make sure that we are completely buttoned up. I think that's a reasonable way to read those comments. you have to think all the ways this can go wrong, and I think at least from my standpoint,

Starting point is 00:09:12 it's worth taking her concern around problems destroying our industry as sincere and not wanting to see that happen. Anyways, it does seem to introduce a whole new set of issues to the stable coin debate that we weren't sure we were going to face, so it's worth keeping an eye on for that reason. Speaking of stable coins, the state of Wyoming is gearing up to issue their own stable coin this summer.

Starting point is 00:09:30 The state issued digital money initiative was set up in March 2023 by the Wyoming Stable Token Act. According to a statement released last week, the token is now ready to begin testing over the coming weeks, and a target launch date has been set for July. The stable token, which is their preferred terminology, will be redeemable for $1 held in trust by the state. This trust fund will be exclusively in cash in U.S. Treasuries, so nothing out of the ordinary for stable coin design. But the entire premise seems to be for Wyoming to demonstrate that they're actively engaging with the crypto industry.

Starting point is 00:09:59 During comments at the Blockchain Summit, Governor Mark Gordam said that Wyoming has the right ecosystem for development. It's a government that is fully accessible, we can turn on a dime we can make things happen. Wyoming has been putting a lot of crypto laws on the books over the years. They've granted legal standing to Dow's, allowed insurance companies to invest in Bitcoin, and chartered multiple crypto-focused state banks. And so while it's unclear that the Wyoming stable coin has any use case, its existence is still interesting. There's potential for the state to incentivize holding or spending the token? They could simply offer it as a convenient way to pay taxes or fees. Primary message that Wyoming is sending, however, is that they're open for

Starting point is 00:10:34 crypto business. Governor Gordon said Wyoming is a place that people come to innovate. We don't like regulation very much. We believe that innovation trumps regulation at every opportunity, but we make sure that we have a consistent role for proper and transparent regulatory structure. Layer Zero said, there's no clear signal of where finance is heading than a U.S. state putting the dollar on chain. Lastly, today, BitWise CIO Matt Hogan has been writing some very insightful research notes over recent months, guiding his clients through a very rough patch for Bitcoin. This week's note focused on the Bitcoin's strategic reserve and encouraged readers to zoom out just a little to understand the implications. Hogan reflected on the first time he learned about Bitcoin way back in 2011. The token had just crossed

Starting point is 00:11:13 the $1 mark for the first time. He noted that if he had invested $1,000 back then, it would have been worth $88 million today. The reason that he didn't was that in 2011, Bitcoin was a wildly risky bet. Custody, regulatory, and technological challenges were numerous. Bitcoin was completely unproven and trading venues were unreliable to say the least. These risks were mitigated. for example, with the launch of Coinbase and with institutional custodians like Fidelity entering the industry in more recent years. However, Hogan wrote, the fear of government bans remained a major overhang. That, he argues, is what changed when President Trump signed an executive order to establish the BSR. The last existential risk-facing Bitcoin disappeared before my eyes.

Starting point is 00:11:51 Many of questioned why the issuer of the global reserve currency would establish a Bitcoin reserve and risk undermining trust in the dollar. Hogan commented, The best case scenario for the U.S. is that the dollar remains the world's reserve currency. But if we get to the point where that's at risk, we're better off moving to Bitcoin than something like the Chinese Yuan. This is what I couldn't see originally. Of course the U.S. would embrace Bitcoin. It's the best backup plan on the market. The theme running through Hogan's notes over the past few months is that this is the, quote, best time in history to purchase Bitcoin on a risk-adjusted basis. His point is that all of the existential risks

Starting point is 00:12:23 to the asset class have been removed, but the market hasn't adjusted yet. In this note, Hogan commented that he's starting to see a realization among his firm's clients as they walk their Bitcoin allocations up from 1 to 3%. He concluded, as more of the world wakes up to the massive de-risking we've seen, I think you'll see this number rise to 5% and beyond. That is going to do it for today's breakdown. Appreciate you listening as always. Until next time, be safe and take care of each other. Peace.

The Breakdown - Are We Finally Going to Get Securities Clarity?

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