The Breakdown - Coinbase Says Without Regulatory Clarity It Will Be Forced to Leave the U.S.

Episode Date: April 19, 2023

The U.S. regulatory crackdown on crypto seems to be having the exact impact that industry advocates feared, because some of the largest companies in the space consider relocating to more favorable regulatory regimes. This week, Coinbase CEO Brian Armstrong is in the U.K., and told an audience at Fintech Week in London that without regulatory clarity the crypto exchange may have to leave the U.S.  Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced and narrated by Nathaniel Whittemore aka NLW, with editing by Michele Musso and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsor today is “Foothill Blvd” by Sam Barsh.   Join the discussion at discord.gg/VrKRrfKCz8.  

In the wake of one of the most tumultuous years in crypto history, the conversations happening at Consensus 20203 have never been more timely and important. This April, CoinDess is bringing together all sides of the crypto, blockchain, and Web3 community to find solutions to crypto's thornyest challenges, and finally deliver on the technology's transformative potential. Join developers, investors, founders, brands, policymakers, and more in Austin, Texas, April 26 to 28th for Consensus 2023. Listeners of the breakdown can take 15% off registration with Code Breakdown. Register now at Consensus.coindex.com and join CoinDesk at Consensus 2023. 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 produced and distributed by CoinDesk. What's going on, guys? It is Tuesday, April 18th, and today we are discussing why Coinbase is saying that without regulatory clarity, they'll be forced to, to leave the US. Now, a quick note before we dive in, I know you've heard it a lot, but just in case you are listening and you somehow haven't heard, this is the last week that the breakdown will be on the CoinDesk podcast network. We announced the Breakdown Network last week, which is a set of shows including The Breakdown, Bitcoin Builders, and now the AI breakdown as well, and that means our partnership with CoinDesk is coming to an end. Going forward, after this Sunday, April 23rd,

if you want to listen to The Breakdown, you will have to subscribe to the Breakdown-only feed. You can find it wherever you listen to podcast by searching The Breakdown or the Breakdown NLW or the Breakdown Nathaniel Widemore, basically anything around the breakdown. So again, that's after April 23rd, which is this Sunday. The breakdown will no longer be on the Coin Desk Podcast Network. All right, folks, so today we're looking at sort of the global crypto acceleration, by which I mean two things. The first is the growth of crypto adoption and interest around the world, but the second is the

flight of crypto away from the U.S. And while a lot of the discussion might be around Coinbase, I wanted to start with a story that grabbed everyone's attention yesterday and was a little surprising and fun one. Apparently, the tiny kingdom of Bhutan has been accumulating millions of dollars worth of Bitcoin for years. Forbes broke the story after discovering that the sovereign wealth fund of Bhutan had been mentioned as a customer in the bankruptcy filings for both Celsius and Blockfi. Bhutan nestled in the eastern Himalayas is home to fewer than a million. people. For those of you who have heard of Bhutan, it might be because they pioneered the idea of

a gross national happiness as an alternative metric to GDP in the 70s and promotes itself as the happiest country on Earth. Now, the Kingdom's sovereign wealth fund, Druck Holdings and Investments, or DHA, has accumulated $2.9 billion in assets since its establishment in 2007. While Druck had not previously disclosed any crypto investments, the kingdom had been involved in a rapid digitization project. In 2021, they conducted pilot tests of a CBDC that was based on Ripple. On top of that, earlier this year, the Kingdom launched a biometric identity platform whose first user was the 7-year-old Crown Prince. Bhutan has also conducted experiments with NFTs in digital carbon credit markets recently.

Now, according to the bankruptcy paperwork, DHA had been an active user of both Celsius and BlockFi, with holdings worth at least $75 million at one point and scores of trades to their name across Bitcoin, Ethereum, Tether, and a handful of other tokens. Now, adding intrigue to all of this, BlockFi is claiming that DHA had defaulted on a $30 million loan in February of last year. They claim that the sovereign wealth fund, quote, failed and refused to repay the loan in full, even after its collateral of 1888 Bitcoins was liquidated, leaving BlockFi holding the bag on a loss of $820,000. DHA was also reportedly actively trading in its Celsius account right up to the date of the firm's bankruptcy, meaning there is some speculation

that the fund may become the target of clawback actions. Of course, holding aside the specifics of Bhutan. What's really got people interested is how much this represents or could represent a larger trend. Sovereign wealth funds are notoriously opaque, but this news does cast new light on long-held speculation that national funds were investing in crypto. There are a few things we know for sure. The Singapore sovereign wealth fund Temasek has made several big-ticket investments into Web3 companies and has long been rumored to hold crypto directly, although the fund denied this claim

last year. There's also been continuous speculation about the holdings of a range of Middle Eastern Gulf states like Saudi Arabia. In Norway, the Norwegian government pension fund, which is the world's largest sovereign wealth fund, does hold shares in micro-strategy, which, of course, has a massive underlying investment in Bitcoin. Still, this is the first concrete proof that a sovereign wealth fund was invested in crypto directly, making many industry advocates wonder how much else has just simply not been revealed. Now, professional organizations surrounding sovereign wealth funds deny that there is any widespread trend. Duncan Bonfield, who's the chief executive of the International Forum of Sovereign Wealth Funds, told Forbes, quote, we have seen no real interest in

cryptocurrency as an asset class, and we do not believe any of our members have an allocation to crypto in their portfolios. I guess for now, we will just have to wait for more bankruptcies to reveal the information. Just kidding, at this point, I shouldn't even say that. No more bankruptcies. Anyway, that news said, let's bring this one back to one of the core issues right now, which is, of course, the U.S. aggressive regulatory stance pushing companies away from the U.S. Even as I record this, SEC Chair Gary Gensler is being grilled before Congress in part around his handling of crypto policy. One of the arguments of crypto advocates in Washington is that the U.S.'s lack of regulatory

clarity and regulation by enforcement is actively driving crypto companies away. Now, as we discussed last week, for the crypto antagonists, this is actually the goal, or at least not a bad outcome. Professor Hillary Allen wrote in her case for banning crypto that was published in foreign affairs that the U.S. should not fear falling behind as a leader in crypto because, quote, it is undesirable to be a leader in an innovation this harmful. She also, by the way, argued that the United States cracking down might be a fatal blow to the industry anyways because, quote, the global cryptocurrency industry relies heavily on funding from

U.S. venture capital firms, meaning it remains an open question whether the industry could survive without that funding. I'm sure our international listeners will bristle at the idea that it's only you. U.S. venture capital that has somehow kept this industry afloat. Anyway, the position that the U.S. shouldn't care about the crypto industry at all is a pretty extreme one, even if growingly popular with crypto's opponents in Washington. I think that there are many crypto moderates who would firmly disagree with the U.S. surrendering leadership in any entire large and growing sector. And if that is the case, that group should be nervous. There is no company more associated with American crypto than

Coinbase. And right now, Coinbase appears to be looking for opportunities across the Atlantic as the ongoing U.S. regulatory clampdown ramps up. Specifically, it appears that the exchange is looking to assist the British government with its ongoing ambition to establish Britain as a global crypto hub. On Monday, the official Coinbase Twitter account tweeted, the UK and Europe are vital to the Coinbase mission. We may be a U.S. listed company, but if we're to succeed in creating more economic freedom in the world, we have to be active globally. Right now, a huge focus is across the Atlantic from our home nation. This week, our CEO, Brian Armstrong, is in the UK, one of our fastest growing user markets. While there, the EU will be adopting the landmark

MECO regulation. In short, things are happening in Europe that are edging the region ahead, and when it comes to embracing the digital economy, the region is preparing for a seismic change in how it uses and thinks about money. Tomorrow on Tuesday, Brian Armstrong will headline the IFGS 2020 in London, an example of just how seriously we're working in the region. He'll be interviewed by the former chancellor of the exchequer, George Osborne, about our focus on the UK. Almost a decade ago, Mr. Osborne saw crypto's potential, ordering Her Majesty's Treasury to examine how the UK could become a powerhouse in the sector. That work has continued. In 2022, the UK government committed to introducing a new regulatory regime for crypto assets with a

consultation launched last month. We want the UK to succeed and be a big part of that success. Progress in the UK towards creating a regulated environment that encourages the industry and protects consumers is incredibly encouraging. So that is a full-throated UK strategy coming down the pipeline kind of quote from Coinbase. And indeed, all of Brian Armstrong's appearances in the UK so far have really reinforced the message. At UK FinTech Week, Armstrong talked about the opportunities for Britain to, quote, turbocharge the sector and cement its place as an innovation hub. In the lead-up to that appearance, Coinbase published a blog post, which included nine policy recommendations that would make the UK, quote, ready to capitalize on the next wave of technological and financial innovation.

Among the recommendations were for the government to ensure that some major UK banks reverse their recent decision to blanket ban transfers to crypto exchanges, as well as push forward quickly with a permissive regulatory framework that includes promotion of the safe use of stable coins. One of the big concerns was a proposal to introduce a 24 cooling off period on crypto trades under the guise of consumer protection. Coinbase argued that a more effective method to protect consumers without harming market structure would be to bolster disclosure requirements and investor education. Also on Monday, Economic Secretary to the Treasury and City of London Minister, Andrew Griffith, held a meeting between the CEOs of major asset management firms and the financial regulator

in a bid to revive a body known as the Asset Management Task Force. Sources say that Griffith was looking to launch a technology working group with the reestablished task force to look at asset industry trends, including tokenization, blockchain, and AI. Earlier that day, Griffith delivered a speech at the FinTech Conference, emphasizing that the government is focused on, quote, fostering innovation by making the UK a safe jurisdiction for crypto asset activity. Griffith added that, quote, we set out our plans in a wide-ranging consultation published in February, and we want to proactively support the use of distributed ledger technology and tokenization where it makes sense. In a press interview outside of the event,

Griffith said that he expects the UK to stand up a regulatory scheme within the next 12 months, adding that quote, I think we've got a really good opportunity here. The UK has always been renown for having high quality but progressive regulations. What we're seeking to do with that is to let people and firms make the most of the opportunities from crypto assets and the broader distributed ledger technologies, but also combined with that good, pragmatic, proportionate regulation. LJ, the founder at Sinks tweeted, as a Brit, awesome news to see Coinbase take an active interest in the UK. Having been in and led regulatory meetings between the big three ISPs and ICO, I know the government peeps will listen with open ears. They go a bit dreamy-eyed and get impressed when American big tech

takes a real interest in the market. And indeed, a real interest Coinbase has taken. This morning, at an interview at FinTech Week in London with former Chancellor George Osborne, Brian Armstrong had some very interesting things to say about the company's future in the UK, or more specifically, the company's future leaving the US. Armstrong said, anything is on the table, including relocating or whatever is necessary. I think the US has the potential to be an important market for crypto, but right now we are not seeing that regulatory clarity that we need. I think in a number of of years, if we don't see that regulatory clarity emerges in the U.S., we may have to consider investing more elsewhere in the world. We actually have contradictory statements from the heads of the

CFTC and the SEC coming out almost every few weeks. How's a business going to operate in that environment? We just want a clear rulebook. Now, there are two different things here. One is whether the U.S. pushes people out, and two, whether the U.K. ends up a good home. Clearly, the U.S. is doing some work to make people feel unsafe and unclear here. And we'll get a lot more into one piece of that tomorrow when we look at the Gensler hearing in Congress. But when it comes to the UK, it feels like there's a little bit of internal tension. On the one hand, we have PM Rishi Sunak, who has made it very clear that he wants the UK to be a global crypto hub. It was part of his big focus when he was the Chancellor of the Exchequer. On the other hand, we've long had a skeptical bank of England

and a banking establishment more broadly that is not particularly crypto-friendly. However, whatever that tension, it feels a bit like there is now a big push to get the skeptical part of the British government in line. Also appearing at the UK FinTech Summit on Monday was Bank of England Deputy Governor John Cunliff, who spoke about the need for cautious regulation around stablecoins. The BOE and the Financial Conduct Authority plan to consult on new rules for stable coins later this year, after foreshadowing the need to protect financial stability from the emergence of tokenized money last May. Conliff's speech spoke about the incredible speed with which digitized money in all forms has been adopted in the UK. And noted that ultimately, the responsibility for

ensuring that all forms of British pounds are, quote, robust and uniform lies with the central bank. He said that it was important to ensure that stablecoins denominated in British pounds are backed by high quality and liquid assets, specifically noting that ultimately this could mean allowing stable coin issuers access to deposits of the central bank. Conliff said, quote, from a public policy perspective, we want competition and innovation and payments, and we need to guard against rapid disruptive change that does not allow the financial system time to adjust and could therefore threaten financial stability. The new rules they're proposing will look to stable coins in a similar way to bank deposits.

Quote, including the requirement that the coin should be redeemable from the stable coin arrangement in fiat money at par value and on demand. Anyway, there are a lot more details in this speech about how stable coins should be regulated in the UK to fit in with the broader system, but it really does feel. Like the focus on this wasn't discussing why stable coins couldn't be a part of the system, but about what it would take for stable coins to be robust and uniform. Now, it's clear that stable coins are a big focus everywhere. Yesterday we discussed them in the U.S., today we just discussed them in the UK context.

But stablecoin adoption continues unabated in Latin America as well, despite regulatory concerns in the depegging of USC last month. The CEO of Argentina-based exchange Bello said, quote, We see that stablecoin adoption continues to rise non-stop since 2019. In fact, stablecoins today represent more than 50% of Bello's trading volume. Augustin Lacerra, CEO of NUMM Finance, also said that he is seeing stablecoin market share continue to grow among his customers. Quote, although it is true that crypto activity has decreased since the bare market,

the participation and capitalization of the stablecoin market has grown a lot. Now, Numb Finance is another Argentinian firm which offers Stablecoins pegged to the currencies of developing countries. Of course, while Stablecoin adoption in the West is mostly driven by the facilitation of crypto trading, in the global south, stablecoins offer easy access to U.S. dollars, which can be used to protect wealth against sky-high inflation. This year, inflation in Argentina, for example, is on track to come in at 110% annualized. one of the highest inflation rates in the world. Remittances in the size of the informal economy

are other key drivers of stablecoin adoption in Latin America, with up to 50% of local residents working in informal conditions and generally outside of the banking system. Of course, in Argentina, there is another wrinkle with U.S. dollar accounts severely restricted by the central bank. Lacerra again said many people want to find a way to dollarize their savings and found in Dye, USDC, and USDT, a very friendly way to do it. And so, friends, it continues to be a weird moment. Over the last few weeks, we've had caused to look at how different jurisdictions are responding to the U.S.'s crypto clampdown. It's basically impossible to look at the example of the UK as we did today, or the example of

Hong Kong and China, as we've discussed a number of times in the previous weeks, and not think that they're reacting quite acutely to the intense pressure that crypto is coming under in the U.S. China had effectively banned crypto, with Hong Kong looking to follow suit, and instead now has their state-owned banks in Hong Kong recruiting crypto companies to become depositors actively. That's only happened after all of the increased ratcheting up of rhetoric in the U.S. In short, the crypto industry is not right now just an economic question. It is a geopolitical and geostrategic question. How we answer that question in the U.S. will be one of the central

shaping factors of how the industry develops over the next several years. Anyways, guys, that's the story from where I'm sitting. As always, I appreciate you listening. listening on CoinDesk Podcast Network again, go switch to the Breakdown Only Network after April 23rd this Sunday. That will be the only place to get the breakdown. Until tomorrow, be safe and take care of each other. Peace.