The Breakdown - Coinbase Launches Crypto Policy Coalition as FDIC Warns of Crypto Dangers to Banks

Episode Date: August 16, 2023

On today's episode, NLW looks at the FDIC declaring crypto one of the year's top threats to banks. Coinbase has also launched a new advocacy coalition to push for crypto policy outcomes. 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 Wednesday, August 16th, and today we are once again talking about a day that shows on the one-hand regulatory challenges, and on the other hand, the crypto industry just keeping chugging forward. 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 internet. 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. Hello, friends. So as I said, today is a day of contrasts, which really, I think, sums up the moment that we are in in crypto right now. Let's start on what could be interpreted as the negative side with a new set of FDIC warnings. The Federal Deposit Insurance Corporation,

the FDIC, has added crypto as one of the five most important categories of risk to the banking sector in this year's annual review. The FDIC report reflected on last year's calamities within the crypto industry and said the agency was prepared to engage in, quote, robust supervisory discussions with the banks it oversees in relation to crypto. Now, for completeness, the other four risks to the banking sector were credit risks, market risks, operational risk, and climate-related financial risk, but obviously we are concerned mostly with the crypto risk here. The FDIC noted that it has, quote, generally been aware of some bank's interest in crypto-asset-related activities through its normal supervision process. However, as that interest has escalated, the agency has desired

to better understand the risks that crypto could impose on banks. In their accounting, the FDIC included a long list of potential risks, including fraud, legal uncertainties, misleading or inaccurate representations and disclosures, risk management practices, exhibiting a lack of maturity and robustness, and platform and other operational vulnerabilities. End quote. In addition, the report highlighted contagion risk due to the close interconnections within the crypto industry, which they said can present concentration risk for banks with exposure to crypto clients. While the report adds no new policy or supervision requirements, the FDIC did say that it, quote, continues to closely monitor crypto asset-related exposures of banking organizations.

Now, of course, this report comes just one week after the Federal Reserve introduced its new novel activity supervision program. This new policy provided a framework for banks to seek approval for crypto-related activities and established a dedicated supervisory team to deal with issues related to crypto. The concern is, of course, course, that these statements from regulators are just a formalization of what has become known as Operation Chokepoint 2.0, effectively a sub-legal way for regulators to financial institutions that they should not be dealing with the crypto industry. By not putting forward official restrictions, there are no formal crypto bans that could be challenged in court. The FDIC was careful to include

in their report the now common phrasing that, quote, banking organizations are neither prohibited nor discouraged from providing banking services to customers of any specific class or type as permitted by law or regulation. And thus regulators are making it clear that they are not legally restricting banks from dealing with the crypto industry, but simply working to better understand the quote novel and complex risks represented by crypto. The open question is whether the threat of enhanced regulatory scrutiny is enough to dissuade banks from working with crypto customers. Now, there is a lot of really interesting tension in this document, as well as in the statement from the Fed last week. On the one hand, there was never going to be an annual report that didn't include

this, two banks that did have crypto concentration risk blew up this year and tapped the FDIC to shoulder losses, and even if we believe that those were hit jobs, it's still a notable part of this year's review. The problem is the same that it always has been, that general warnings without specifics, that banks and financial institutions can follow, de facto mean a freezing process where banks just decide that it's not worth the risk to deal with this industry. Now, interestingly, the most recent Fed document seems to be nudging to a different phase in this, in which even if onerous, and even if increasing regulatory supervision, they are nominally providing a path for banks and financial institutions to deal with stable coins in that case.

They sort of have the have-your-cake-eat-to-benefit of, in the short term, still probably having something of a freezing effect on activity in that area, but in the more medium-to-long-term, still providing some path for those intrepid institutions that are willing to take on the risk, giving them cloud cover to say, look, we were never trying to freeze activity. These were just the important hoops to have to jump through. In many ways, it's hard to get too chuffed about this particular FDIC report, in that it feels both inevitable after what happened over the last six months, as well as sort of in line with what we already knew. Now let's flip over to the other side of this coin coin and talk about how the crypto industry has continued to respond to these regulatory

challenges. Coinbase has launched an independent advocacy group, the stand with crypto alliance. The group is aimed at mobilizing support for legislation that would form the basis of a regulatory framework for crypto in the U.S. Coinbase says that the group will be, quote, crypto's first true grassroots movement that will be organized on chain. Now, of course, other lobbying groups focused on crypto have represented industry voices. However, this group is intended to be much more focused on getting real legislation done. Coinbase wrote in a statement,

By providing a launch pad, the alliance is mobilizing the full force of the decentralized crypto community to tell lawmakers, recess is over. America's crypto constituency is strong and will be holding them accountable this fall when Congress votes on common sense legislation to protect consumers and their right to crypto. Fariorashirzat, Coinbase's chief policy officer said, I think a few politicians are seeing crypto as an easy shot to take. I don't think they have fully understood the passion and the community behind it. Now, it's worth noting that previous mobilization efforts of crypto constituents have proved

to have a powerful impact on influencing lawmakers. In August of 2021, passionate crypto voters contacted the representatives in an effort to soften reporting requirements in the infrastructure bill. Now, the bill was ultimately passed without amendment due to an unreasonable. related political move of one intransigent senator, but the mobilization effort was viewed as a success, with the crypto community frankly holding up efforts for weeks, and many lawmakers recognizing for the first time just how large and passionate the crypto community is. In rallying this new group, Coinbase are attempting to remind Congress that this community is still here and still care

deeply about the passage of functional crypto legislation. Now, interestingly, this Coinbase group was not the only advocacy organization announced yesterday. I saw a tweet from Nick Carter that read, sorely needed, excited to see where this goes. Proof of work has been an afterthought in crypto conversations in Washington for too long. What he's referring to is the fact that the crypto mining industry now has its own lobbyist group in Washington. The Digital Energy Council is designed to push Congress for sensible regulation that will allow Bitcoin mining to continue to grow in the U.S. The group said in a statement on Tuesday that they will be advocating for policies that, quote, promote responsible and sustainable energy development, grid resilience, maintain United

States competitiveness, and protect national security. Miners have, of course, faced a stream of criticism from Democrat lawmakers in recent years, based on assumptions around environmental harm and concerns over excessive energy usage. The political attacks reached a crescendo in May when the White House proposed a punitive 30% tax on the mining industry to account for the, quote, harms they impose on society. Tom Mapes, the founder of the Digital Energy Council, said that the organization will, quote, focus on how both the digital asset mining and energy industries can collaborate and work together to bolster energy infrastructure, increase resilience, and support energy sustainability and efficiency that has been lost in policy conversational.

yet is critical during this pivotal moment of energy modernization. MAPS previously worked on energy policy at fellow lobbying group, the Chamber of Digital Commerce, and was also the chief of staff at the Department of Energy's Office of International Affairs. A key part of the lobbying group will focus on dispelling lawmakers' misconceptions around digital asset mining, and the group will also have a focus on cultivating economic development in rural and overlooked communities, which can benefit from investment by the mining industry. The goal MAPS said is to highlight that digital asset mining is a real-world tool that can be utilized to meet the United States energy goals. Zach Bradford, the CEO of Mining Company CleanSpark, noted that the new lobbying group is,

quote, uniquely focused on the intersection of mining and energy abundance. He said in a statement that, quote, Politics is a team sport and the broader our coalition and the more dedicated the efforts, the better. Senator Lisa Murkowski of Alaska was one of the first lawmakers to pay attention to crypto mining as a relevant industry. She said in a statement, in 2018, as the chairman of the Energy and Natural Resources Committee, I held the first hearing to explore

digital asset mining and the applications and potential impacts on our nation's energy supply. In the past five years, this industry has grown exponentially throughout the United States, and I have seen this technology already bring new opportunities to rural states like Alaska. I look forward to working with the Digital Energy Council to develop best practices for collaboration throughout Alaska and the United States. Senator Cynthia Lummis, who of course has long been a staunch advocate for the crypto industry, said, financial innovation will unleash new prosperity and opportunity for the next generation of Americans.

And crypto asset mining is an important part of this future. Innovative mining technologies will allow us to harness underutilized energy sources and drive jobs in rural America while generating provably scarce wealth. All Americans should be paying attention to the important work being done by crypto asset miners. Now, one last note on this theme at this intersection of crypto regulation versus crypto lobbying, Republican allies have continued to push their efforts to figure out just how the hell Prometheum was granted a special purpose broker-dealer license. Now, this new category of SPBD license was established in December 2020 in order to allow firms to custody and transact in digital assets. For over two years, FINRA, which is the industry

oversight arm of the SEC, refused to issue any licenses to applicants. Prometheum was granted the first of its kind SPBD license in May, which was just in time, coincidentally, for the firm's co-CEO Aaron Kaplan to appear in a congressional hearing the following week. Kaplan promoted just how viable the SEC's existing path to regulatory compliance is for crypto firms, which was, of course, a distraction from efforts to engage with the tabled legislative efforts. However, as everyone noted, the appearance was incredibly weird. Following the hearing, it became clear that Prometheum couldn't actually legally offer any crypto assets for sale, had no viable business model, and even had some strange ties to a Chinese mega firm. Despite multiple media appearances subsequently,

Kaplan and Prometheum appeared to have no clear answers for literally any of these issues. This has led to much scrutiny, and now House Financial Services Committee Republicans, led by Chairman Patrick McHenry, have asked both the SEC and FINRA to explain themselves. In a letter made public on Tuesday, the lawmakers asked for documents and communications related to the approval of Prometheum's license. They noted that, quote, the timing and circumstances surrounding the approval of Prometheum as the first SPBD raised serious questions. The letter raised concerns that the approval, quote, was aimed at demonstrating that legislation is not needed, and that regulators had, quote, touted the Prometheum approval multiple times in public statements to support

their position that digital asset firms can comply with the existing regulatory framework. The lawmakers pointed out, however, that, quote, while Prometheum claims it has the silver bullet for regulated digital asset offerings, it has not yet served a single customer. They said, quote, it is unclear why Finro would have chosen to approve a firm with no operating history and no track record of serving customers over all the applications that it has received. The letter also addressed the troubling ties between Prometheum and Chinese firm Shanghai Wang Ching blockchain, which has, quote, deep ties to the CCP. The letter claimed this raises, quote, serious national security and data privacy concerns. Senator Tommy Tuberville of Alabama said,

The SEC and FINRA are dragging their feet and failing at their core mission. It's past time they look into Prometheum's ties to China. Thank you to Patrick McHenry and the Financial Committee for keeping up the pressure on this issue and looking out for American investors. Now, as you might imagine, in the crypto industry remains extremely skeptical of this company. Jared Klee tweeted, besides not being able to settle transactions, a director with deep ties to the China Communist Party and zero customers, Prometheum looks like a great company. The SEC and FINRA have been given until Tuesday to produce the relevant documents and communications to explain this frankly baffling licensing decision. So friends, that is the story from here. We are in a very in-between moment.

It feels like the plates are shifting and like things are starting to line up in a productive direction for the industry, but there's still a lot of work before us. Appreciate you listening as always, and until next time, be safe and take care of each other. Peace.