The Breakdown - Congressman Who Called Bitcoin an ‘Unstoppable Force’ to Become House Financial Services Committee Chair

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. The breakdown is sponsored by nexo.io, circle, and crack it, and produced and distributed by CoinDesk. What's going on, guys? It is Saturday, December 10th, and that means it's time for the weekly recap. A quick note before we dive in, there are two ways to listen to the breakdown. You can hear us on the CoinDesk podcast network, which comes out every afternoon, features other great coin desk shows, or you can listen on the breakdown-only feed, which comes out a few hours later in the evening. Wherever you're listening, I would so appreciate it

Starting point is 00:00:43 if you would take the time to leave a rating or a review. It makes a huge difference, and I appreciate everyone who does so. Also today, I'm thrilled to welcome CryptoWatch as an additional sponsor. CryptoWatch is the last crypto app you'll ever need. Track prices up to two times faster than other apps, catch market movements as they happen with powerful charting tools and custom alerts. sync your portfolio and trade across multiple exchanges and stay in the community conversation with leading influencers on CryptoWatch social. Say goodbye to your other crypto apps because you can get everything you need to gain a competitive edge with CryptoWatch.

Starting point is 00:01:16 Visit Google Play or the Apple Store to download CryptoWatch today. All right, so today on this weekly recap, we are covering a slew of stories that we just didn't have time for in another crazy week. We've talked a lot about regulatory action this week, but one positive bit of news on that front was Patrick McHenry taking over as chair of the House Financial Services Committee now that Republicans have taken control of the House. McHenry, who already served as ranking Republican member on the committee, was widely viewed as the leading candidate. In a statement, McHenry set out his views on how he would preside over the committee.

Starting point is 00:01:48 Quote, as chairman, I will pursue an innovation and opportunity agenda. We will focus our efforts on constructing appropriate and aggressive oversight of the Biden administration, as well as pursuing bipartisan legislation to put Americans back in control of their personal financial data, enhance capital formation opportunities, and develop a comprehensive regulatory framework for the digital asset ecosystem. Now, McHenry has been one of the more productive politicians when it comes to crypto and fintech policy in general. He helped craft early crowdfunding legislation and more recently took the lead in negotiating the comprehensive legislative framework for stablecoins.

Starting point is 00:02:20 While he has been an advocate for encouraging fintech and crypto innovation, he has little tolerance for deception, misdirection, or performative hearings. I first noticed Patrick McHenry when, in 2019, he gave that unbelievable statement calling Bitcoin an unstoppable force at the first Libra hearing. He urged Congress back then and has done so since to comprehend and really understand this technology before regulating it out of existence. So welcome and congrats, Congressman McHenry, we are looking forward to your leadership. Now, staying on the regulatory theme for just a moment, on Wednesday we had the first hearing in the case between Uki-Dao and the CFTC. The case sees the CFTC attempting to sue a Dow for operating an unregistered derivatives exchange.

Starting point is 00:03:03 The CFTC has already settled its case against B0X and its founders, which was the company that operated the exchange before launching the Uki-Dao. The outstanding legal issue is whether a Dow can be sued at all as an unincorporated association and how legal processes like service of documents should work in that situation. What has made this case notable in the industry is that multiple organizations have filed amicus or friend of the court briefs in order to argue against the CFTC's position. This has been necessary as so far neither the Dow nor its members have stepped forward to defend themselves in the case. Stephen Paley, a partner at Brown Rudnick,

Starting point is 00:03:36 was present to represent crypto law collective Lex Punk Army. Others present included representatives from Paradigm, A16Z, and the Defy Education Fund. Now, the CFTC argued that the Dow had sufficiently definable structure to be sued, despite only knowing for sure that the two B0X founders, whom they had already settled with were members. The judge broadly agreed with this argument saying that, quote, the issue is whether and how the Dow can be served. The judge queried how the CFTC intends to, quote, enforce a remedy without knowing who's involved in this organization. This was a major point from the industry lawyers, who argued that this case was intended only to set a precedent that Daos can be sued, rather than to obtain any particular enforceable order

Starting point is 00:04:13 against Uki Dao itself. The CFTC served the lawsuit by sending a copy to a service chatbot on Uki Dow's website and are now asking that to be recognized by the court. Now, an important requirement of service is that the court must be satisfied that the defendants are aware of the lawsuit. Crypto industry lawyers are of the opinion that it is currently impossible to know whether members of Uki-Dau are aware that they are being sued by the CFTC, and that given that the CFTC does not know the identity of the members, there's no reasonable way to know whether they are aware of the lawsuit. While the technical legal arguments are important, the broader point about regulatory overreach came through strongly from industry lawyers.

Starting point is 00:04:49 James Burnham representing paradigm said, quote, The CFDC has issued no guidance at any point on how they should be regulated, what frameworks apply or anything. This is the very first regulatory action the agency has taken, and it is a very weird way in our view to start sort of applying the Commodity Exchange Act to these new technological innovations. He then put to the court that this case is definitely designed to result in a default judgment and probably will result in default judgment if your honor allows service to progress,

Starting point is 00:05:15 because nobody really understands who's in the association and who's out. James McDonald, representing the Defi Education Fund, argued, quote, Just as individuals shouldn't be permitted to use Daos to shield themselves from prosecution for unlawful conduct, the government, we respectfully submit, shouldn't be permitted to use Daos to skirt those restrictions on its own prosecutorial authority. Ultimately, the judge reserved judgment for a later day, promising to come back with a decision relatively soon after he has reviewed the materials. The CFTC's point that the formation of a Dow should not be allowed to be used as a legal shield from being able to be sued is a solid one. But there is a lot more going on than just that. We'll need to wait and see how the court qualifies that point against setting a legal precedent that Dow should be treated just like any

Starting point is 00:05:55 other formal organization when there are clear issues of identity raised by these new types of organizational tools. The Defi Education Fund tweeted, we continue to assert that the CFTC has failed to demonstrate that appropriate notice was served and that the CFTC's theory of liability is unsound and cannot be stretched to encompass individual token holders. We look forward to Judge Orix ruling. James McDonald, again representing the Defi Education Fund, said, because the stakes are so high in the novelty of the case, which I think we've all recognized here, we think it's all the more important that the government be required to turn square corners on service. In an ecosystem where innovation is the norm, it's the basics that are in the spotlight.

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Starting point is 00:08:26 The SEC has warned public companies that if they've been caught in recent crypto market turmoil, they had better warn investors. On Thursday, the agency's division of corporation finance sent letters to companies it regulates, which said, recent bankruptcies and financial distress among crypto asset market participants have caused widespread disruption in those markets. Companies may have disclosure obligations under the federal securities laws related to the direct or indirect impact that these events or any collateral events have had, had or may have had on their business. By way of example of the types of risks that require disclosure, the letter included, quote, excessive redemptions, withdrawals, or a suspension of redemptions or withdrawals

Starting point is 00:08:59 of crypto assets. So obviously the key point is that the SEC is trying to get a full picture of the contagion risk throughout U.S. public crypto firms. The Division of Corporation Finance is the SEC's disclosure arm, which advises securities issuing companies, such as companies that issue publicly traded shares about how to properly inform investors about meaningful threats to their business. Earlier in the week, SEC Chairman Gary Gensler had reiterated his view that the agency had made clear to crypto companies what they should do, telling a reporter on Wednesday that, quote, the rules are there, and that, quote, law firms know how to advise their clients to comply. Now, one more crypto regulatory note before we move on from that.

Starting point is 00:09:36 US senators Ed Markey and Jeff Merckley, together with Representative Jared Huffman, introduced a bill on Thursday, which, if passed, would direct the Environmental Protection Agency or EPA to study the energy usage and environmental impact of crypto mining. While cautioning that crypto mining threatened U.S. energy goals and local power grids, the lawmakers said that the Cryptoacet Environmental Transparency Act would direct the EPA to produce a report examining the effects miners using more than 5 megawatts of power have on greenhouse gas emissions. In a statement, Marky said the mining firms were, quote, undermining decades of progress in our fight against climate change by putting profits over the promise of our clean energy future.

Starting point is 00:10:11 Ensuring crypto mining companies report their greenhouse gas emissions is a necessary step, towards holding them accountable and protecting communities across the country that rely on the grid to heat their homes, cook their food, and go about their daily lives. Marquis also warned that utility companies may have to raise prices for other consumers, an issue that has been cited when other communities consider imposing restriction on mining firms. The bill itself refers to concerns about climate change and its growing ecological impacts, including droughts, wildfires, and unusual weather events. The bill says, quote,

Starting point is 00:10:38 crypto asset mining operations are often designed to generally increase computing requirements over time, which can lead to increased energy consumption. A crypto asset network Bitcoin consumes more energy annually than countries such as Chile or Bangladesh consume. Noise and water pollution are two other concerns raised in the bill. It would also bring energy recommendations for mining firms in line with those already in place for data centers. The bill recommends that the EPA proposed rules for the mining industry that require greenhouse emissions reporting and to assess firms are operating with requisite permits. Merkley pointed to mining facilities being powered by fossil fuel electricity generation in a statement saying that this practice, quote,

Starting point is 00:11:13 has an environmental impact on climate chaos equivalent to putting 30 million gas-burning cars on the road, and a lot of that fossil electricity is generated at power plants that have a disproportionate impact on disadvantaged in frontline communities, making bad environmental justice issues worse. The statement also mentioned mining machines being discarded after they burn out, and the, quote, strain on fragile electric grids. Now, I think the reason that it's worth noting this, I have no sense of its political viability or feasibility. It seems like there's going to be a lot of different crypto-related bills going through Congress

Starting point is 00:11:43 and not all of them are going to make it through. But what it does is it shows the state of the discourse. This is basically just a litany and a greatest hits list of mining impact fud, all put together by congressional staffers to make a political point. These types of battles are going to be a lot harder to fight, given everything that has transpired in 2022, and is going to require a lot of concerted and coordinated effort to beat back the worst impulses of Congress when it comes to issues like crypto mining.

Starting point is 00:12:13 Now, to round out this weekly recap, we have to give a little bit of an update on Sam and FTCS. One of the key themes of this week has been debates around whether Sam would actually testify at next week's FTX-related hearings. Remember, the House Financial Services Committee is having a hearing on Tuesday, and then the Senate Banking Committee is having a hearing on Wednesday. Maxine Waters has been gently upping the pressure on Sam, saying that a subpoena was on the table, while meanwhile, Sherrod Brown and the Senate said explicitly that if Sam didn't show up, he would be subpoenaed. And what's more, they expected that to be in person. Well, on Friday morning, Sam tweeted, I still do not have access to much of my data, professional or personal,

Starting point is 00:12:54 so there is a limit to what I will be able to say, and I won't be as helpful as I'd like. But as the committee still thinks it would be useful, I am willing to testify on the 13th. I will try to be helpful during that hearing and to shed what light I can on, FTCUS's solvency and American customers, pathways that could return value to users internationally, what I think led to the crash, my own failings. I thought of myself as a model CEO who wouldn't become lazier disconnected, which made it that much more destructive when I did. I'm sorry. Hopefully people can learn the difference between who I was and who I could have been. Now, crypto is not having this, and really the only question to them at this point is whether he'll actually show up in person.

Starting point is 00:13:34 Former federal prosecutor James K. Phelon said the media in Washington need to stop giving SPF a soapbox from which he can whine. isn't about his feelings or what he wants to do. This is about his fraud. We just need to remember that DOJ is building a case and is going to drop a house on this piece of shit. Johnny Deaton, founder of CryptoLaw.us, says there's a limit to what he can say and he won't be as helpful as he would like to be. So says his lawyers, dot, dot, dot. Now, Sam couldn't stop himself from tweeting more. He decided to respond to a long thread from CZ about Kevin O'Leary, who continues to say that Sam just made a mistake. On Friday morning as well, Sam and ZZ got into a big back and forth about Binance's withdrawal from FTX and how it went down.

Starting point is 00:14:16 The tweet that really pissed people off came from Sam when he said, You won CZ. There's no need to lie now about the buyout. The average response was something along the lines of what Sam Price, CryptoLifer 33, said. This dude talks about winning and losing like it's a game. People lost everything they had because of this guy. Sickening mentality. Now, the next question that a lot of people have is who else is going to testify at these hearings. Rumors are floating around that there will be Kevin O'Leary.

Starting point is 00:14:44 Rumors are floating around of all sorts of different names. So far, I haven't seen anything concrete, but what's clear is that all the focus is going to be on Sam. And for those who are frustrated that justice has not been done yet, I will just leave you with this. Bloomberg reported this week that the bankruptcy management team at FTX met with federal prosecutors at the Southern District of New York. FtX's new CEO, John J. Ray III, and lawyers for the crypto firm were present for the meeting with the DOJ office that's heading investigations into the collapse of FTX. According to an anonymous source, new management at FTX were cooperating with the investigation and may have further meetings with prosecutors as the matter progresses. The meeting in the existence of the investigation were not made public by the DOJ. Earlier this week, the DOJ office of U.S. trustees had filed an application for an independent examiner to be appointed to investigate in the FTX bankruptcy hearing.

Starting point is 00:15:32 If approved by the court, this will allow the examiner to investigate, quote, substantial and serious allegations of fraud, dishonesty, and competence, misconduct, and mismanagement. In its application, the DOJ said it was focused on the large questions about the fundamentals of this case. Was this an unsuccessful business or a successful fraud? It is to me, like to all of you, frustrating, to not feel like justice is being done yet. But it has still been at this point one month since the bankruptcy. There are a lot more part of you. of this story to come. And hopefully at the end of it, the industry will be in a better place to move on, focused on the future. For now, I want to say thanks again to my sponsors, next to dotio, Circle, Cracken, and Crypto Watch. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Congressman Who Called Bitcoin an ‘Unstoppable Force’ to Become House Financial Services Committee Chair

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