The Breakdown - Congressional Gaslighting: For Crypto, the Partisan Ship Has Sailed

Episode Date: May 11, 2023

Another week, another crypto hearing, and this time the Democrats handed out talking points. NLW discusses how partisan the discourse around crypto and Bitcoin are becoming and assesses whether it is likely to be a winning political strategy.  Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto 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 Thursday, May 11th, and today we are talking about why for crypto, the partisan ship has sailed. Before we get into that, a quick note. If you are enjoying these terrible puns, please come join us on the Breakers Discord. It is the place where we talk about everything going on in the news, sometimes in crypto, often and beyond, and it would be better if you joined as well. You can find a link in the show notes or go to bit.ly slash breakdown pod. Now, if you, like so many of us, can't handle crypto discussion anymore, why don't you check out the AI breakdown? It's your daily brief on everything happening

in the world of AI. You can find it wherever you listen to podcasts or on YouTube at YouTube.com slash at symbol, the AI breakdown. All right, friends, it has been an extremely active couple of days in the politics of Bitcoin and Crypto. First of all, Brad Sherman has just been all over the place talking about how we're all subhuman tax evaders and how the U.S. should really be asking whether this industry should be allowed to exist at all. Here's a recent clip from him on Bloomberg crypto. There's this fear of missing out that we've got to keep up with other countries. You know, Peru is way ahead of us in cocaine production. China's way ahead of us in Oregon harvesting. We don't need to keep up on those things and we don't need to keep up on crypto.

As for protecting U.S. investors, investors know, and they certainly know now, that when you send your money to the Bahamas or Cayman Islands, you do not have protection. You could lose it all. And the idea that we should tell investors that something's licensed in the United States when it's not only as dangerous for the investors as crypto is, but as harmful to our country. as crypto tries to be, I don't see a reason to do that. At the end of the day, though, Brad Sherman is going to shirm, so no surprises there. A bigger deal was on Tuesday, May 9th. The official Biden-POTUS account tweeted, We don't have to guess what Maga House Republicans value.

They're telling us. Now, that quote led to an image which said, we think Congress should cut, tax loopholes that help wealthy crypto investors, $18 billion. Now, one kind of enjoyable thing about this was that people use Twitter's new note feature to add some context that they thought people might want to know. Quote, virtual currency is treated as property and general tax principles applicable to property transactions apply to transactions using virtual currency. When investors sell virtual currency, they must pay tax on any capital gain. There is no evidence of loopholes to avoid this.

Still, I think that the particular language used here by the presidential account is revealing. First of all, it shows Democrats getting more comfortable lumping crypto in as explicitly a partisan category. Second, it shows that their strategy is to just write it off as another class warfare cudgel. In other words, it's the rich people that have caused all your problem and the crypto people are rich people. Third, it shows a casual disregard for the truth, but, you know, this is politics, so that's to be expected. Fourth, it suggests to me that internal battles around the position of crypto on the left side of the aisle have been resolved in favor of the the antagonists. And indeed, that would be 100% validated later in the week when we got some pretty interesting talking points around a congressional hearing. So yesterday, a hearing was held in

Congress to discuss gaps in crypto market structure and the regulatory future of the industry. The House Financial Services Committee hosted the joint hearing with the House Committee on Agriculture and heard from a range of heavy hitters in the crypto policy space, including Timothy Mossad, director at Harvard's Digital Assets Policy Project, Marco Santori, the chief legal officer at Cracken, Matthew Cullen, a partner in the futures and derivatives practice at Wilmer-Harell Law firm and a former CFTC director, as well as traditional finance industry folks like Michael Blogger and the chief operating officer at the New York Stock Exchange. The House Ag Committee was present due to their oversight of commodities regulation by the CFTC, while the Financial Services

Committee has oversight over the SEC. Chairman of the House Financial Services Subcommittee on Digital Assets, French Hill, pointed out, if we fail to provide a functional framework for digital assets in this country, then all we're doing is forcing this activity to happen in an offshore exchange. That will only hurt U.S. investors, innovators, and consumers. Cracken-Chief legal officer Marco Santori drew attention to the rival regulatory frameworks that are developing globally. Many countries, he said, are advancing effective, practical, fit-for-purpose rules covering digital asset participants. Although approaches differ by jurisdiction, there is a common thread through these efforts. Instead of forcing new products into old regulatory schemes, they craft more effective

rules from tested principles. Centauri contrasted this to the regulatory gaps in the U.S., which have, quote, spawned an unending docket of both public and private litigation. This litigation has not protected consumers. This litigation will not protect consumers either. Congress can fill these gaps with clear mandates. And when it comes to gaps, Matthew Kulin, who formerly acted as a CFTC director, drew attention to the massive gaps left by the current regulatory landscape. He said, quote, The largest digital assets that are traded by market size and volume are commodities. Products like Bitcoin and Ethereum already have CFTC registered futures contracts trading on CFTC registered exchanges.

The current framework limits the CFTC's enforcement authority solely to fraud and manipulation in the digital commodity spot market. That authority is insufficient to adequately protect customers. Basically, Kulin's point was that without an oversight role for the CFTC in spot crypto markets, there will be no regulators that can enforce basic investor protections like segregation of customer funds on exchanges. Timothy Mossad, the director at Harvard's Digital Assets Policy Project, advocated for Congress and regulators to move away from the fixation over securities and commodities definition. Instead, he suggested they recognize that the primary concern needs to be investor

protection, regardless of how assets are classified. Quote, we don't have a federal regulator of the spot market in tokens that are not securities, and we have this classification debate which makes that gap worse. He suggested a simplified approach. Pass a law, he said, that requires that any trading platform or lending platform that uses or trades Bitcoin or Ethereum has to comply with a set of principles for everything it does, all the tokens on the platform. Those principles would be ones we're all familiar with, protecting customer assets, preventing fraud and manipulation, requiring risk management, requiring reporting, preventing conflicts of interest, and so forth. Massad pointed out that this could be implemented either via joint rulemaking of the SEC and CFTC, or by

creating an industry's self-regulatory body as exists in derivatives markets. Demonstrating just how low the bar for increasing investor protection is, Massad noted that over 90% of spot market trading occurs on centralized intermediaries, and that, quote, simply eliminating wash trading on those platforms would be a big improvement. Now, moving back to the politicians involved, financial services committee chairman Patrick McHenry reminded the lawmakers present that, quote, the purpose here is to make law. His key point was that if the SEC is successful in their crusade, to classify most tokens as securities and continue their crackdown, that still leaves massive gaps in the regulation over commodity cryptos like Bitcoin. He argued that for this reason, clear and direct legislation

needs to be passed to set a regulatory framework. He said those things have to happen because the CFTC and SEC alone can't do this. Congress must act. It's worth noting that during an appearance at consensus last week, McKenry said he expects a crypto market structure bill within two months. As part of all of this, House Republicans posted a draft resolution on the committee website. They contended that the SEC is currently making a mess of things and suggested that regulators need to wait for direction from Congress, which should legislate bespoke rules, which establish the same kind of investor protections that are present in other markets. The Democrat commentary, on the other hand, was more adversarial to the industry, with many rejecting the very premise

of the need for any lawmaking whatsoever. Stephen Lynch, the senior Democrat on the Digital Assets Subcommittee, expressed his concerns. He said, I'm worried that erecting a new law could be viewed as a light touch. Creating a separate regulatory regime through legislation is not the answer. He argued a point that we will see was very important to the Democrats yesterday, that, quote, the problem is not regulatory ambiguity. It is mass noncompliance. Ranking Democrat member of the Financial Services Committee, Maxine Waters, appeared to advocate for an even broader remit for the SEC to act outside of historical norms

and begin proactively regulating firms outside of the U.S. She said, Treasury and our financial regulators also identify further gaps in oversight in the crypto markets, such as limits in the SEC's authority to go after frauds like FTX, even when they operate just up the coast of Florida. These should be bipartisan concerns and legislation to address them should have a path to the president's desk. Now, let's be clear. This is basically Maxine Waters suggesting that the SEC should be able to hop in a bunch of Apache helicopters and roll on down to the Bahamas to make sure that Sam isn't doing what Sam did. I'm not totally sure if that's the authority we really want our securities regulators to have, but hey, that's just my opinion.

And while usually I don't want to get into this level of, oh, come on now, it's a little rich coming from the woman who famously blew kisses to Sam after he appeared before Congress. And then, of course, it wouldn't have been a house hearing without a wildly out-of-pocket statement for Brad Sherman. This time, he seemed to want to grab the attention of Bitcoiners, who are currently concerned about excessive deficits and money printing. Crypto bros, he said, make money literally by making money. They've made over a trillion dollars. They'll accuse the U.S. government of making money out of thin air. Maybe we do, but we're the U.S. government. Anyway, all of this was just the entree, because later in the day, Fox business reporter Eleanor

Tourette dropped this absolute bombshell. She writes, Scoop. Prior to today's Financial Committee House Ag Committee hearing on digital asset regulation, a memo was circulated among Democrat committee members. It contained quote-unquote key messages for the Dems to stick to, including support of the SEC's total authority over crypto regulation, its assertion that nearly all cryptos constitute securities, and that crypto's problem is in ambiguity, its mass noncompliance. The messaging also asserts that committee Republicans who are looking to cut the budgets of financial regulators are not actually serious about protecting investors and should instead focus on passing a clean debt ceiling bill not on pro-crypto legislation. Now, these talking points are so inflammatory that I think they need to

be read in much more completion. The document says key messages. One, while Republicans claim they are working to provide clarity to the markets by carving out space for the CFTC in crypto, they're simultaneously undermining and hamstringing the agency by proposing to cut its budget. Republicans are proving that they aren't really serious about protecting investors and consumers. Two, committee Republicans are trying to pass pro-crypto legislation in June? Well, newsflash, our nation is set to default on its debt as early as June 1st. Republicans' number one priority must be to join Democrats in passing a clean debt-sealing bill to avoid an economic catastrophe before it's too late. Three, Republicans have decided to embark on a partisan pursuit of sweeping digital assets legislation that erects entirely new

legal frameworks for the crypto industry, when neither the Biden administration, investors, the SEC, nor other financial regulators have called on Congress to do so. For, the problem is in ambiguity, its mass noncompliance with existing laws, and crypto companies can't be let off the hook. The U.S. has a regulatory system that has worked well and sustained massive innovation in the financial system for decades. We can't invent new accommodating regulatory structures simply because crypto companies refuse to follow clear rules of the road. Five, is it a turf war if no one is fighting? Both the SEC and CFTC are aligned on the fact that the SEC is the regulator to determine if crypto assets are securities, and the SEC has made clear that nearly all crypto assets

are securities. End of story. Number six, under Chair Gensler, the SEC has built up the strongest enforcement team yet to go after crypto criminals and protect investors and consumers from harm. Unfortunately, committee Republicans want to reverse course and tie the hands of the SEC. The SEC must continue to lead the regulations of the U.S. crypto market, and Congress must do its part to provide them with the resources they need. I have a few thoughts reading this, if you will just bear with me. First of all, did F. F. F. King Gary Gensler write this? Jesus, it couldn't be more. obsessed with him if he wrote it himself. It's so clearly trying to position him for leadership

in the next Biden administration. Number two, it shouldn't surprise any of us that any side of the aisle would be so loose with the truth. But the idea that no one has suggested that Congress should create crypto legislation is just patently untrue. Biden's executive order last year suggested that this was exactly what needed to be studied just as one example. It's egregious. It's a lie. It's a political talking point. Number three, it's pretty clear that contentiousness around the debt ceiling is a big driver now of other financial partisan divides between Republicans and Democrats. In other words, the subtext of all of this is just trying to get Republicans to focus on the thing that Democrats want them to focus on, which is the debt ceiling. Crypto in their mind has just

become a proxy for money stuff, and their contention is that Republicans care about money stuff because of their rich constituency. Number four, make no mistake, this is going to lose Democrats. Because let's talk about the political strategy here. Who does this type of positioning actually help Democrats with? One died in the world Democrats who are already ready to assume that anything having to do with money is a scam or evil or whatever, but it's not like that's a new constituency for them. Maybe people that got burned last year, who are now angry at crypto for having lost money. Totally possible that it scoops some of them. But I can't really think of anyone else.

And my point here is that it doesn't really convert anyone new. It's just red meat for the home team. Now, who politically might this hurt them with? Well, one, a decent chunk of the 10 to 20% of the country that holds crypto and know these positions are full of crap. And among them, there are many groups that feel disenfranchised by the current financial system, who were looking to crypto as a release valve. I'm not going to go out making broad sweeping claims about entire groups of people.

However, the Democrats have seemed real comfortable doing exactly that. You hear a lot of them, saying that African Americans and other minority communities were the most targeted by crypto. And it is definitely the case that the rate of growth in crypto was higher in non-white communities in the U.S. But was that because they were targeted more aggressively? Or, alternatively, because those groups had more reason to be interested, more likelihood of having been de-platformed or unbanked, and came to crypto by themselves. Investor protection

language is always dangerously near patronizing and even infantilizing. And this type of discourse, in my humble opinion, pushes that right over the edge. The point is, the political calculus to me seems quite dubious. My feeling is that a bunch of Beltway staffers who live in incredibly isolated little bubbles have decided that crypto is part of the class war and that class war is a winning strategy. I think it's incredibly sad. Dave Weisberger, the CEO of Coin Routes, wrote, it's hard to say what's sadder, the fact that they feel the need to defend their anti-innovation, pro-banking cartel policy, or the continued use of false and misleading statements to do so. Either way, jobs and capital are leaving the U.S. If, as I believe will happen, the next generation

of capital markets is digital, the risk of these policies is that the U.S. will lose financial market primacy, which has been worth millions of jobs and trillions of GDP. But as you heard in that Sherman's statement earlier, they don't care. I have to say that every day that goes on, I get less and less optimistic for a nonpartisan future for Bitcoin and crypto. I'm praying the voices like Congressman Richie Torres who said that people suffer from an anti-crypto derangement syndrome start to lead out. But it's not looking good right now. Anyways, guys, that is the story from yesterday's hearing. Like I said, I feel like the partisanship has sailed, and what's left is just this muck. Until tomorrow, be safe and take care of each other. Peace.