The Breakdown - Crypto Allies Introduce Securities Clarity Act

Episode Date: May 19, 2023

Congressional Blockchain Caucus leaders Tom Emmer (R) and Darren Soto (D) have introduced the Securities Clarity Act, which is designed to ...well...give clarity on what tokens are securities and when. The crypto community has heralded it as simple, common sense, and potentially hugely positively impactful.  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 Friday, May 19th, and today we are talking about a clapback at the SEC, or really just a request for what seems like it should be a pretty easy thing to deliver. 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 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. All right, friends, we are closing the week out strong. As you well know, 2023 has been the year of

regulatory reckoning. And one of the big questions has been, would our allies among the political classes actually step up? And more particularly, would our Democrat allies, not just our Republican allies, step up. This has been desperately in need lately. To understand the state of play, this is a comment from crypto developer Makesy around the library case in which a single comment from a PR in turn was basically used as evidence that there was an expectation of profit, therefore making the LBRY token a security. Makesy writes, The lack of a quantitative standard makes every Howie analysis and basically all of securities

law seem like an intersubjective guessing game to infer the expectations and intentions of unknown and unrepresented third parties to determine whether implicit contracts existed. Seems like there is basically no legal analysis happening at the SEC anymore. It's all politics and cranking out enforcement form letters. Consistency doesn't matter. But their theory seems to be that everything is a security. All secondary transactions of tokens are securities transactions and should happen on a national securities exchange. Things can't morph into non-securities after being securities, decentralization is impossible, and there's always a, quote, team in the middle. And if something is decentralized and there is no team in the middle, then the token holders are conveniently considered to be

the team in the middle and will therefore be liable for whatever securities laws violations they can get a judge to sign off on. Basically, they're acting like, we just want this to go away, and if you use this technology, we will make your life hell and try any legal theory we can to see what sticks until you're bankrupt. I think this is a very admirable sum up of what it feels like right now vis-a-vis the SEC in crypto, and so that's why people were so excited to see the news yesterday that House Republican whip Tom Emmer and his Democrat counterpart, Darren Soto, have introduced the Securities Clarity Act. It's a bipartisan bill introduced by the two co-chairs of the Congressional Blockchain Caucus that seeks to provide issuers of digital tokens with clarity around their

status as securities. The bill tackles head-on one of the most problematic legal issues around digital assets, which is, of course, the fact that a token can both be used in the initial fundraising for a project and then later function as the utility token for a decentralized network. Under the current legal framework, there is no clarity for how these tokens, which might initially be a securities offering, can transform into being regulated more like commodities. The issue is at the heart of major cases in crypto, including the Ripple case and the library case, where the SEC has argued that secondary market transactions should be treated as the sale of unregistered securities. Without clarity around this issue, it's difficult to legally issue

tokens as a fundraising mechanism that can later be used as utility tokens in crypto networks without being subjected to ill-fitting securities regulations. Tom Emmer wrote on Twitter, today I introduce the Securities Clarity Act with Representative Darren Soto. The bill clarifies the regulatory classification of digital assets and provides market certainty for innovators and clear jurisdictional boundaries for regulators. Without a distinction between the asset and the securities contract, token projects that raise capital to fund development cannot move out of the securities framework once the project is decentralized, which hinders the utility of the project and ultimately harms token holders. The Securities Clarity Act inserts a key term, the investment contract

asset into existing securities law to enable crypto projects to reach their full potential in a compliant way, allowing the United States to compete globally for this next iteration of the internet. So basically, just to reiterate, the bill functions by legally distinguishing between the initial investment contract, which is generally considered to be a security, and the asset issued under that contract. This would mean that initial coin offerings could be used to raise funds for a project and would be subjected to securities regulations, but the digital assets which are issued then, can later be used in token networks without the restrictions of securities law once the network is decentralized. Now, this bill was originally introduced in 2020, but failed to

progress to a vote. It also has echoes of the Lummis-Jillabrand Responsible Financial Innovation Act, which also sought to deal with this thorny issue. Emma explained the economic rationale behind the bill. So long as we lack a clear definition under the law for what is a commodity and what is a security, he said, American innovation will suffer. Entrepreneurs need to be able to accurately calculate risk to create new investment opportunities and grow our economy. Soto, meanwhile, explain that the bill attempts to strike a balance between the legal clarity required to foster innovation while maintaining relevant investor protections. Soto wrote, Blockchain technology contributes to our nation's economy by allowing innovation to grow.

Congress is working to protect those who invest in this technology with the Securities Clarity Act. This bill will add critical definition and jurisdiction to create certainty for a strong digital asset market in the United States. This is an important step. in maximizing the potential of virtual currencies for the U.S. economy, all while protecting customers and the financial well-being of investors. Now, blockchain industry groups were unanimous in their support of the bill and the novel approach to solving the underlying issue. Jerry Brito, the executive director of Coin Center, said, this is the smartest approach we have seen to provide clarity around how securities law applies to digital assets. Kristen Smith, the CEO of the Blockchain

Association said, as interest in digital assets grows, industry needs clear rules of the road so that companies can offer products that consumers want while maintaining consumer protections. The Securities Clarity Act would go a long way towards providing regulatory clarity for the securities treatment of digital assets, and we are proud to support its reintroduction. Perry Ann Boring, founder and CEO of the Chamber of Digital Commerce said, Establishing a predictable legal framework for tokens is one of the most pressing issues facing the digital asset marketplace today. The Securities Clarity Act is crucial legislation that provides much-needed certainty for investors, consumers, and businesses by reaffirming the

difference between an investment contract and digital assets sold or transferred under the terms of an investment contract. Mike Wazacac, the General Counsel at Alliance Dow says, Simple, elegant five-page bill that clarifies what we all should already know. Contracts to develop and maintain and share profits from orange groves or software protocols are securities. The groves and protocols themselves, and the oranges and tokens they create are obviously not. Crypto-tax guy writes, here's an eminently reasonable five-page bill, clarifying that tokens are not forever tainted as securities, just because the development company issued token warrants and safs to VCs during its seed rounds. In other words, a token is not,

in and of itself, an investment contract. Really capturing my feeling, Mark Jeffrey wrote, At last, the adults are doing adult things. Now, as leaders of the Congressional Blockchain Caucus, Emeran Soto have spearheaded numerous bipartisan crypto-related bills. In March, for example, they put forward the Blockchain Regulatory Certainty Act, which sought to affirm, quote, that blockchain developers and service providers that do not custody customer funds are not money transmitters. Essentially, they were trying to make it clear that miners, validators, wallet developers, and defy protocols were not subject to money transmitter licensing requirements. As opposed to, for example, that Responsible Financial Innovation Act, which we discussed just a

minute ago, their legislative approach so far has seemed to aim at dealing with the granular legal issues that the crypto industry presents rather than creating ambitious wholesale new regulatory structures. Instead, they're proposing small but critical changes to existing regulation to ensure that it makes sense when applied to digital assets. Staying on the governance theme, we had yet another hearing on stablecoins yesterday. On Thursday, the House Financial Services Committee's subcommittee on digital assets held the second congressional hearing on stable coin policy. The prior hearing held last month featured proposed legislation from only the Republican side of the committee. This time around,

both bill proposals from both sides of the aisle were presented for discussion, each with minor changes from the draft bipartisan legislation that had been negotiated extensively in the second half of last year. One of the major changes common to both proposals was disallowed non-bank stable coin issuers, access to Fed services, including master accounts, and access to the discount window. Subcommittee chairman French Hill opened the hearing by noting that the two bipartisan bills are not that far apart in their aims and their language. Hill said, we're not starting from scratch. The similarities between the two proposals are strong, and that's why we're not that far apart. And in some ways, he's right. Both parties' bills emphasize the need for robust reserve

requirements, thorough attestations to provide transparency into those reserves, and a coherent regulatory supervision framework. He'll set the stakes for getting legislation on the books as a matter of urgency. Opposing legislation is not a vote in favor of consumer protection. It's a vote for putting consumers at risk by allowing a regulatory environment that pushes stablecoins further away from appropriate U.S. regulatory oversight. In his opening, Democrat ranking member Stephen Lynch summed up the Democrat talking point that any legislation would provide undue legitimacy to the crypto industry. He said, my concern with stablecoins remains the same as the last time we held a hearing on this topic. Stablecoin issuers claim their products are pegged to reserve assets and use for the purposes of payments

when we know that is not correct. 80% of stablecoin volume is dedicated to facilitating the trading of cryptocurrencies and are instead used as speculative instruments. He discussed the major problem with stablecoins as he sees it, which is vulnerability to runs which could pose risks to monetary policy, national security, and financial stability. Lynch made clear that for any legislation to receive his support, it would need to require stablecoins to remain segregated from the banking system. Maxine Waters used her time to highlight one of the key differences with the Democrat bill, which would grant the Fed the ability to veto state licensing of stablecoin issuers. Seeming to conflate all crypto firms together, Waters pointed out that the Republican bill

didn't require the segregation of funds and custodial wallets, which had caused the problems that scores of crypto exchanges over the past year. This conflation was a common threat among several of the Democrat lawmakers, who at times appeared more interested in discussing the broader issues within the crypto industry, rather than limiting their focus to the stablecoin issues on the agenda, with a view to actually getting some of this much-needed regulation on the books. One of the major sticking points for the Democratic side throughout the hearing was the Republican proposal for state-based regulation to run alongside federal oversight from the Fed. Democrats saw this as likely to cause a race to the bottom,

with stable coin issuers seeking out the most permissive regulator. Warren Davidson, slightly heated at the idea that the Republican bill would encourage regulatory arbitrage, said, the whole point is that we're trying to provide a clear legal framework for the entire country, so that no one state can game the system. Republicans was that stablecoins would continue to exist with or without the blessing of the U.S. government. So therefore, it's in everyone's best interest to encourage stablecoin issuers to submit to a coherent and permissive domestic regulatory framework. Davidson put forward this point stating that, quote, often stablecoin issuers are fleeing our shores to find certainty, so it would be great if we would provide some. Head of the venture firm Department of XYZ,

Matt Homer agreed, stating, quote, stablecoins will happen regardless of whether we want them to happen or not. Offshore issuers are as free to create dollar-backed stablecoins as U.S. issuers. We should have done in the U.S. so we can regulate it on our own terms. Now, as you would expect, Brad Sherman was completely uninterested in asking any questions of the panel of expert witnesses and instead said that he was here to quote, channel Nancy Reagan, just say no to crypto. He meandered through a range of barely related topics, blaming crypto for billionaire tax evasion, drug dealing, and sanctions evasion, seemingly oblivious to the fact that all of those problems predated stable coins by a very long time.

Sherman's key point to the extent that he had one was that Americans should be prohibited from having financial privacy, and that the correct path forward for achieving that is a CBDC. As an aside, for people who are actually interested in the potential upsides of a CBDC in terms of dealing with issues like getting people better access to their money faster without them having to resort to payday lenders or whatever pro-cbdz positions one might have, Brad Sherman is basically your greatest enemy. He is constantly out here arguing for a CBDC for all the reasons that, anti-CBDC people are worried about CBDCs. Now, moving on from Sherman's little aside,

as always, New York Democrat Richie Torres demonstrated a thorough understanding of the legislative issues and the technology. Speaking against his party's view that state regulation was unsuitable, Torres pointed out that, quote, there has been a suggestion that state regulators cannot be trusted to regulate state licensed stable coins without parental supervision from the Federal Reserve. He argued that state regulators have proved perfectly capable of regulating state chartered banks, a feat which seems to him, quote, far more complicated than regulating a fully reserved stable coin which takes on no credit risk at all. Instead of giving the Federal Reserve a veto power over state regulators, Torres instead proposed common federally mandated minimum standards to avoid regulatory

arbitrage between states the approach that seems to be working just fine for many other non-bank financial services. Torres even took a swipe at the efficacy of federal regulators that seem to have gained the support of the broader Democratic Party. Federal regulators, like the SEC, he said, spent more time targeting Kim Cardass. than Sam Bankman freed, so the evidence is crystal clear that we've been poorly served by the SEC's regulatory ambulance chasing. In a powerful demonstration of just how simple getting agreement on the basic principles of Staplecoin legislation should be, Tora's obtained full consensus from the witnesses on the idea that Stablecoin issuers should be one required to hold full reserves,

two, obtain third-party audits, three, redeem Stablecoins on demand, and four be prohibited from leveraging or co-mingling customer funds. If there is a major takeaway from this hearing, it's the simple point that Staplecoin regulation has now risen to the level of importance that requires multiple congressional hearings in such a short period of time. And frankly, despite being at times misguided or obstructive, there were even some glimpses of progress among Democrats. Still, although the House appears to be moving this legislation along, there's been little indication that the Democrat-controlled Senate Banking Committee is at all interested in any eventual bill as of yet. A final quick note on markets, Bitcoin and Ethereum fell to local lows on Thursday on the release of

lower-than-expected jobless claims numbers. The report showed that 242,000 Americans had filed for unemployment, which was down 22,000 from last week, and 12,000 lower-than-consensus estimates. Lower-than-expected jobless claims data indicates that the labor market remains robust, which could be seen as an indication that the Federal Reserve still has room for more interest-rate hikes. Later on Thursday, Dallas Fed President Lori Logan indicated that the current data doesn't yet support a Fed rate pause. She said, the labor markets continued strength appears to be contributing to high inflation. She said that barring further weakness showing up in the data, she would likely support a further rate hike at the Fed's

forthcoming FOMC meeting on June 13th and 14th. Not comfortable to call it a pause, Logan added that, quote, the data in coming weeks could yet show that it is appropriate to skip a meeting. As of today, though, we aren't there yet. Now, of course, hanging over all macro at the moment is the U.S. debt ceiling negotiations. Time is almost up for a deal to be reached. And while both President Biden and Republican House Speaker Kevin McCarthy, confidence on Thursday that a deal would be reached soon, there is currently no deal to speak of. Noah Latchison wrote in her Crypto's MacroNow blog that, quote, We can agree that a default would be bad news all around, but perhaps would be good for Bitcoin

and gold as fiat economy alternatives. Still, Bitcoin ended Thursday on one-month lows of 26,500. All right, guys, that's it for this week. We'll be back tomorrow for the weekly recap, as always. I appreciate you guys listening, and until tomorrow, be safe and take care of each other. Peace.