The Breakdown - Bitcoin Rallies Defiantly as Senate Infrastructure Battle Hits a Snag

Starting point is 00:00:00 You know what? I think it's better for us if this one is at least a little bit about narrative. So I'm calling this Bitcoin's defiance rally. Rightly or wrongly, I like to believe it is the market expression of an entire industry, even a movement collectively rejecting the attempt by an outside force to stifle and stop it. Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts, making our world. The breakdown is sponsored by Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Monday, August 9th, and today we are talking about Bitcoin's defiant

Starting point is 00:00:45 rally as the Senate battle hits something of a snag. So let's get caught up on everything that happened this weekend. At this point, I'm going to assume you know the setup at least somewhat. Last minute provision in the infrastructure bill looked to get around $28 billion of the bill's total cost to be covered by new tax reporting rules around crypto. The problem? Well, there are a lot of problems. For one, the Joint Committee on Taxation that came up with this number hasn't had to show its work anywhere, and there's fairly good reason to be skeptical that there's nearly $30 billion in underreported crypto taxes. But, alas, that wasn't the issue we had to focus on. Instead, the issue at hand was that the new reporting requirements swept everyone in crypto networks,

Starting point is 00:01:27 including non-custodial actors like minors, validators, and software developers into the definition of a broker. By their very nature, these actors don't have access to the info they would be obligated to report. Anyway, fast forward. Over the course of the last week, Washington was assailed with what they found to be a shocking amount of lobbying from the crypto community. Shocking to them, perhaps much less shocking to those of us who actually know about the fervor in this space. A bipartisan group of senators, including Republicans Pat Toomey and since the alumnus and Democrat Ron Wyden put forth an amendment that made clear exemptions for people like minors. This seemed like it shouldn't have been all that controversial. Republican Rob Portman,

Starting point is 00:02:08 who wrote the provision in the first place, had said numerous times that the intent was not to include those people. However, the Treasury Department, who he was consulting closely with, wanted maximum flexibility to write the implementation, however they chose. At the end of last week, Senators Rob Portman plus Democrats, Kirsten Cinema, and Mark Warner, dropped a counter amendment, which only excluded proof of work and which was frankly just so jaw-dropping. I have a whole rant on that from Friday if you want to get into it. But I think that gets us to roughly where I left you. So let's talk Saturday.

Starting point is 00:02:42 The mood going into the weekend to use this word again was defiant. We were not about to roll over. Senator Toomey tweeted, While I appreciate that my colleagues in the White House have acknowledged their original crypto tax had flaws. The Warner Portman Amendment picks winners and losers based on the type of technology employed. That's horrible for innovation. The Warner Portment Plan exempts Bitcoin miners, but not other transaction validators or software developers who create these platforms. What does that mean? Two identical services could receive dramatically different regulatory

Starting point is 00:03:10 treatment depending on the technology used. The U.S. Treasury wants maximum flexibility to regulate and tax crypto as they see fit. Congress should not allow that to happen. We need to have this debate in public and in full, especially before potentially disruptive changes are made that push crypto overseas. We can all agree that centralized exchanges should be subject to the reporting requirement included in this bill, just like brokers would be subject to report other assets. But why rush and get it wrong? Now isn't the time for the IRS to pick winners and losers with a new technology. Crypto has the potential to be the future of the internet. How foolish to crush it over a tax provision that possibly raises just 500 million per year in a more than 1.2 trillion.

Starting point is 00:03:51 billion dollar bill. The first principle here should be do no harm. The Warner Portman Cinema amendment will drive developers to create software outside of the U.S. I urge my colleagues to oppose it and join me, Senator Wyden, and Senator Lummus in protecting American innovation. Let's just take a moment to acknowledge a senator publicly discussing this field as the future of the internet. Either way, Saturday morning kicked off and the first notable thing was that Warner had made a change in his provision. The first exemption changed from protecting anyone validating proof-of-work transactions to anyone validating any transactions, regardless of the consensus mechanism. While absolutely an improvement, it still didn't protect protocol developers explicitly, and the sense was good,

Starting point is 00:04:35 but not good enough. Fight for the future, which has helped facilitate tens of thousands of calls, like literally over 40,000 at last count, around this bill, wrote, quote, The Warner Amendment still sucks. It fundamentally misunderstands how decentralized tech works. It would effectively attempt to force software developers to spy on their users or get shut down. Writing code is a form of speech. Vote no on Warner and yes on Wyden-Lumis-Tumee. Indeed, for a little while that morning, it looked like we were getting more support. Steve Dane, Senator of Montana, tweeted, I urge my colleagues to support the Wyden-Lumis-Tumee amendment to the infrastructure bill. It ensures that Congress, the IRS, and Treasury are not putting their thumb on the scale of any particular tech. The market,

Starting point is 00:05:14 and Congress should encourage competition, not stifle it. Ted Cruz tweeted, the Senate is on the verge of passing legislation that would be terrible for cryptocurrency. The infrastructure deal contains dangerous provisions that would devastate crypto and blockchain innovation. Supporters of crypto need to make their voices heard. By the early afternoon, however, another plot twist. The competing Warner Amendment was changed again. This time, specification around which type of miners was added back in, but instead of just proof of work, it was also proof of stake, which was honestly just head-scratching. CoinCenter's executive director Jerry Brito tweeted,

Starting point is 00:05:50 Senator Warner has revised his amendment yet again. He now excludes proof of work and proof of stake, but not any other consensus mechanism. I'm speechless. Now they're picking two winners? There are other consensus mechanisms. Why do this? Nyrash from Coincenter followed up with what could be an evergreen tweet for this whole affair. I can't believe this is how policy is getting made.

Starting point is 00:06:09 LMAO, how is this real? Even though this seemed wacky, Jake Chervinsky tried to interpret what was going on. He tweeted, quote, they likely thought validate distributed ledger transactions could be construed broadly to protect various elements of defy unless it explicitly specified minors. I'm not sure they even consider the difference between proof of work and proof of stake. They just don't want stakers to be accepted. By Saturday evening, another day had come and gone with no voting. The Washington Post's Mike Debonis tweeted, floor is now deserted except for, dot, dot, dot, dot, the crypto gang. Wyden, Portman, Warner, Toomey, Ossive, in a fairly intense conversation in the corner while cinema chats with Republican legislative staff. By Sunday, the nation's political media apparatus was getting the picture that the crypto industry was no pushover.

Starting point is 00:06:54 The Washington Post wrote, Senate sits divided on regulation of crypto industry, negotiations stall infrastructure bill, show cryptocurrency's power. In political on Monday morning, Washington wakes up to crypto influence amid infrastructure fight The industry was caught off guard when the Senate targeted it with new tax rules, but it fought back with a vengeance. Much of the focus in these pieces has been on Democrat Ron Wyden, someone who is seen as a big proponent of tax increases historically. The interesting thing is, when pushed, his opposition to the crypto provision of the bill seems to come from a place of principle. Quote, when civil rights groups, tech experts, and folks in Oregon raised concerns that this provision could be interpreted to regulate independent developers and force programmers to create government back doors, I took their concerns seriously."

Starting point is 00:07:38 End quote. It's also clear to everyone at this point, though, that this is not just about the infrastructure bill. That political piece concludes, quote, for lawmakers, the episode has created a new sense of urgency to get up to speed on a hot part of the economy that barely existed a decade ago. Senator Shelley Moore Capito said there's a big impetus that we should all be understanding this a whole lot better. The breakdown is sponsored by Nidig, the Institute.

Starting point is 00:08:10 grade platform for Bitcoin. As long-time listeners know, NIDIG is a major force in the Bitcoin space, and they're now making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers to offer Bitcoin. That mainstream access is critical for all of us, and you can learn more about it at NIDIG.com slash NLW.

Starting point is 00:08:32 That's N-Y-D-I-G-com forward-slash N-L-W. One narrative that seems to be sticky is that this is the future of the internet. We saw this in Toomey's tweets, and Mark Cuban is also pushing that as well, sending an email comment to the Washington Post that said, quote, shutting off this growth engine would be the equivalent of stopping e-commerce in 1995 because people were afraid of credit card fraud, or regulating the creation of websites because some people initially thought they were complicated and didn't understand what they would ever amount to. Still, by last night, the specific changes in the bill were looking to be a fight that was slipping away, not because support was dwindling, but because larger

Starting point is 00:09:12 issues were taking precedence. The Washington Post, Jeff Stein, tweeted yesterday afternoon, worth noting that even if we get a widened-warner White House crypto agreement, it may not wind up in the bill because there may not be amendments allowed for complicated Senate procedural reasons. Jake Chavinsky wrote, discussions regarding a compromise amendment are ongoing. The broader politics and process around passing the bill are starting to predominate, though. It's possible no amendments will be proposed at all, which means we'll be stuck with the current language. Senator Portman on Sunday afternoon gave a floor speech that was explicit about who was not intended to be included in this law. Miners, stakers, validators, software, and hardware devs, note operators. This was a sort of

Starting point is 00:09:51 political consolation prize. Hey, you don't get the actual language of exemption, but I'm going to signal to the Treasury Department who interprets the law and makes the rules what we intended when we wrote it. I said it last week and I'll say it again. I find this wildly insufficient, especially given how clearly hostile treasury is across two administrations now to the crypto industry. On Sunday night, Senator Lummis gave her account of what it transpired, saying, this has been an interesting day. Here's what is happening. First, we've been able to have productive conversations with senators on all sides of this issue, and if we could vote on amendments, I think the digital asset community would be pleased with the outcome. Right now, we need an agreement on allowing

Starting point is 00:10:28 amendments, which is being held up because of conflict between senators over the 30-hour rule, which allows the Senate to consider read review a bill for up to 30 hours before. for voting on it. Some senators want to keep focusing on the infrastructure bill for 30 hours to raise awareness about its price tag. Senator Schumer wants to quickly vote in order to focus on other legislation and won't allow amendment votes unless that happens. So we're at an impasse. I understand my colleague's positions. But real people are going to be hurt if we do not change the language in this bill. Tomorrow we'll be back in session and again work to convince our colleagues and Senator Schumer that our amendment deserves a vote. Ted Cruz had a slightly hotter take.

Starting point is 00:11:03 Crypto got screwed tonight. There's a partisan disagreement on spending, so Dems objected to all further amendments. That means no vote on Wyden-Lummus to lessen the damage this bill will do to crypto, and no vote on the Cruz Amendment to repeal the new crypto rules altogether. The result, the Senate's going to inflict billions of dollars of damage on the growing and exciting crypto industry and drive much of it overseas. There aren't five senators who understand much of anything about crypto. What the Senate said tonight, let's tax the hell out of something we know nothing about so we can pass a giant bill we haven't read and spend the American people's money on stuff we can't afford. It's reckless and harmful. Speaking of Ted Cruz, one thing that has

Starting point is 00:11:41 been frustrating some folks all weekend and farther back even, is that we never even had a chance to debate his proposed amendment of striking the provision entirely. Square Cryptos Miles Souter had a perfect write-up of this, saying, pretty crazy thinking that we as a cryptocurrency community couldn't, quote, credibly support the Ted Cruz amendment to strike all mention of crypto in the infrastructure bill, because the CBO had already allocated that budget windfall and removing it threatened to torpedo the entire pork bill. Before we even started debating the merits and implementation, the Congressional Budget Office had already pulled some number out of thin air that this provision would supposedly bring in, locking the community into negotiating this bill

Starting point is 00:12:17 within this limited, questionable framework. Because they put a dollar amount to this provision, it became impossible to argue against the very legitimacy or ontological necessity of the provision. For if it was removed, the total funding is a new issue. of the bill changes and all of a sudden there's a bigger political shit show on hand. So striking the provision was a non-starter. They surprised us with a cage and the only option was to battle from within. With zero notice and limited time, the only option was to adapt the skeleton legislation presented and ensure it does the least amount of harm. It's so crazy that this is how legislation is made in D.C. These are incredibly complex, technical, and impactful issues. They deserve

Starting point is 00:12:55 thorough contemplation, debate, and public discussion in order to ensure that policy put in place optimizes future American prosperity and innovation. Even after spending so much time dialed on this the last week and weekend, I'm still not sure how this is going to turn out, nor when this decrepit system or process will ultimately produce an outcome. All I know is that it doesn't have to be this way. We can do so much better. I think Miles lined, they surprised us with a cage and the only option was to battle from within it, is pretty, pretty perfectly put. So, back to the this morning, from Jake Trevinsky again. To get the infrastructure bill crypto provision amended, we need one, a deal on compromise language between Wyden-Lumis-Tumie and Warren Reportment,

Starting point is 00:13:34 and two, unanimous consent for the amendment from the full Senate. Senators' offices are open. Now is our last chance to be heard. As I was preparing this, Senator Ron Wyden wrote, we've been working hard to get a deal. I don't believe the cryptocurrency amendment language on offer is good enough to protect privacy and security, but it's certainly better than the underlying bill. Majority leader Schumer says he won't block a unanimous consent request on it. So that's where we are. I'm sure that by the time you're listening to this, there will have been more plot twists and turns. But in the meantime, the markets have been absolutely defiant. Bitcoin has rallied from lows between $38,000 and $39,000 last week to $46,000 at the time of recording. The rest of the industry

Starting point is 00:14:15 is likewise up, with ETH comfortably above $3,000, and that's to say nothing of NFT mania, which is for another show. So what's going on? Well, part of it, as I said, may be simple defiance, a show of strength. Part of it may be the stricand effect. For a couple weeks now, political news has been dominated by stories of the crypto industry and increasingly our strength, which could be attracting new people in. Suu wrote, Crypto mooning as senators panicked by upon realizing that not only is it not tulips, but it's likely the single most important issue for an entire generation. I get the impression that Sue was being only a little tongue-in-cheek. Of course, it could also just be market structure and technicals.

Starting point is 00:14:54 At the beginning of July, Willie Wu pointed out that as speculators continued to sell down, the long-term holders were, quote, mopping up coins, a classic on-chain divergence unseen since October 2020. He followed that up this morning, saying, quote, the last two months has been one of the largest divergences in short-term Bitcoin mispricing the fundamentals ever seen in its history. We're watching it unravel now in real time. But you know what? I think it's better for us if this one is at least a little bit.

Starting point is 00:15:21 bit about narrative. So, I'm calling this Bitcoin's defiance rally. Rightly or wrongly, I like to believe it is the market expression of an entire industry, even a movement collectively rejecting the attempt by an outside force to stifle and stop it. There is a lot to catch up on this week. We haven't even had the chance to talk about the latest drama on Binance or Circle trying to become a bank or the SEC's Polonex decision. So hopefully we'll have some more time for that this week. But for now, I appreciate you listening as we watch this crazy story unfold. Until tomorrow, guys, be safe and take care of each other. Peace.

The Breakdown - Bitcoin Rallies Defiantly as Senate Infrastructure Battle Hits a Snag

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