The Breakdown - Crypto Daily 3@3 - 7.30 | Recap of Senate Banking Committee Hearing On Crypto Regulation

Episode Date: July 30, 2019

In their second hearing in 2 weeks, the Senate Banking Committee invited 3 panelists to discuss the current state of and recommendations for crypto and digital asset regulation. In this recap, I look at three key points: 1) the shadow of Libra and Big Tech; 2) calling BS on "bank the unbanked"; 3) the sense of inevitability.  Watch the video version: https://www.youtube.com/nathanielwhittemorecrypto

All right, welcome back to another Crypto Daily 3 at 3. So today was another hearing day. We were back to the Senate Banking Committee, a site of the scene from David Marcus' hearing two weeks ago about Libra. And today the theme was theoretically about cryptocurrencies and digital assets beyond just Libra. So the conversation was meant to be a hearing about regulatory frameworks for crypto assets in general. And so I think there's a couple of things that are important to acknowledge. First,

it's undeniable that Libra is the meta-context that is provoking all of these hearings now, right? Sure, you know, Bitcoin has been sort of on the agenda. Blockchain has been something people are hearing about, but the reason that it's arising as an issue right now that you're seeing hearings, you know, back-to-back and consecutive or, you know, just a couple of weeks apart, is that people are nervous about Libra. And so today the real question was, were we going to see some actual substantive conversation about regulations and the way that the U.S. regulatory regime

should engage with crypto assets, or were we just going to see another Facebook and Zuckerberg Bashfest? Because if you remember, a couple weeks ago, there was almost no substantive conversation about cryptocurrencies at all. It was entirely about Facebook. And so what we saw today is that first,

there definitely was a move away from just the rampant Zuckerberg bashing, right? This wasn't about that, perhaps just because there was no one from Libra there to take those punches. But second, it was also very clear that the dominant and overarching context for every part of this conversation is Libra, but not just Libra, it's the rise of big tech and the feeling among these senators that big tech is moving into the place that big banking might used to be in terms of one, to just do anything that it wants, get away with it, and not have any pressure from regulators. That was definitely the undertone. And I think you heard it over and over again. It was kind of from both sides of the aisle. But certainly that is the context for which, you know, that is

coming in these conversations. So what does this mean? I mean, I think there's good things and bad things about this. The good thing, I guess, we'll start with, is sort of that Bitcoin continues to have almost a secondary focus. People continue to feel like the bigger threat is Libra. And to some extent that allows Bitcoin to continue to grow and evolve. You know, Bitcoin isn't asking for regulation right now. It's companies that are building around Bitcoin or that are building for other cryptocurrencies that want that regulation. So to the extent that it gets to kind of continue evolving and in some ways evolving alongside rather than just simply replacing the existing economic system, the safer it is. Now, the bad side is that with Libra as the standard

bearer for the entire cryptocurrency industry, it severely limits what people are willing to even consider and contemplate as the role of these new technologies and these new types and forms of money-like things, MLTs, if you will, in the existing financial system. So again, the takeaway here is that even though this was theoretically about something other than big tech and Libra, it was about big tech and Libra. And I think that we can expect every hearing about cryptocurrencies to be about big tech and Libra, at least on a subtext level. All right. Number two, calling BS on banking the unbanked. This is the second big theme that I heard from this group. So, okay, so let's take it back again. One of the big arguments,

for Libra, or that Libra is kind of trying to present as justification for itself, is this idea that it's going to help bank the unbanked, that the existing financial system isn't working for the vast majority, or not for the vast majority of people, but for some meaningful number of people, that there are far too many people who are excluded by this system. We started to see a little bit in the congressional hearings and in the Senate hearings before, what I would call kind of skepticism with this. You had folks who were asking, you know, well, how is Libra going to make a difference?

Is it going to require things that are kind of structurally already difficult? Are people going to be able to participate in this system if they don't have, you know, smartphones and so on and so forth? And there weren't actually a lot of getting answers. In fact, I think one of the things that, one of the most interesting responses from the Libra hearings a couple weeks ago was a real frustration on the part of people who genuinely are aligned with that mission of banking the unbanked and just helping kind of the disenfranchised portion of the economic pie have better access to services. David Marcus, for all the stuff that he did well and for all of the kind of common patience he showed in poise, he showed under questioning, he did not have good answers to be blunt about banking the unbanked. He didn't have stats

on command about what portion of Facebook's user base that represented. He didn't have the ability to you know, call up and make clear what they believe the real impact would be, he spoke almost entirely in platitudes and people were kind of seeing through it. And so today, I would say that that was extended greatly. So one of the three panelists, there was a crypto native with the Circle CEO, Jeremy Ayer, was there. And then a couple of professors. One was Rebecca Nelson and the other was Merza Baradaran. And her big thing, so she was definitely kind of the crypto-sceptic, I would say, of this panel. But the interesting thing about it was that it seemed to me to be almost less about what potential cryptocurrencies might have. And more of frustration that in her mind,

there are, well, two things. First, that the issues, the challenges faced in terms of banking, the unbanked have less to do with, call it new technology and more to do with policy, right? And so she spoke a lot about things like how payday loans become predatory because of the weight periods when people cash their checks and why people would sometimes prefer to just go and cash their checks with payday loan services because it's worth the 10% to have that money now versus overdraft fees versus what have you. And so her kind of sentiments, which were echoed a couple times by senators, were mostly, it wasn't even so much about crypto as more as this whole conversation we're having is a distraction when there are very clear, easy solutions right here. Basically, the technology already exists.

It's really just the will and the political force to actually implement those solutions. And in that worldview, all of these kind of hearings around crypto and whether crypto assets are going to solve this are just kind of distractions. So the interesting thing about that is that I don't think that's an incompatible view with being bullish and excited about cryptocurrency. I think that's a prioritization. That's a timing. But I do think that it has implications for to what extent this idea of banking the unbanked is going to be the kind of the moral suasion that gives. gets people in positions of regulatory power excited about this industry. I think that I would say that so far, not only has banking the unbanked, not convinced regulators to give Libra or to give

cryptocurrencies a pass, it has done the opposite. It has made them seem flippant. It has made them seem caricature of themselves. And I think this was best kind of expressed today by Senator Brian Schatz from Hawaii, who effectively said that it sounds. again kind of just like technology founders and big tech founders saying they're going to wave a magic technology wand and solve all the problems without the messy work of policy and people being involved. So again, this almost goes back to theme one as well in this kind of larger context of big tech and Libra and there's real skepticism here. So I think this is an important one to watch because this is a major narrative thrust and it doesn't seem to be working. And with that, we'll go on to the last little bit. So theme three, outstanding issues and inevitability.

So there were definitely a set of outstanding issues. This was a short hearing comparatively. It was only about an hour and 38 minutes when all was said and done, which was nothing compared to the five, seven hour marathons that we had a couple weeks ago, which also, by the way, should show you where this ranks relative to Facebook and Libra and those issues. However, there were a few things that I think are worth mentioning. So one, it was kind of subtle. It was brought up by Mark Warren.

was the idea that, you know, we're talking all about blockchain, but after 10 years it hadn't really had a breakout use case even in other regulatory regimes. And so should we even care? I think it's kind of a relatively easily refutable position, but it's worth noting that it was there. A second was the idea of this AML question, the KYC question, the terrorist financing question, those have not gone away. They didn't come up or they came up much, they came up in passing today rather than kind of an in-depth analysis. I think both in terms, in part because of the composition of who this expert panel was. That wasn't necessarily their area of expertise, so they didn't dwell on it. But that issue remains significant, I think, as it relates to cryptocurrencies

and how they're going to sit in the U.S. regulatory structure. Libra. I mean, it feels like in some ways, and maybe not even Libra is the best way to put it, but Facebook. There is an unresolved antitrust question as it relates to Facebook, social media, and data that, don't necessarily have anything to do with crypto but are now because of Facebook getting involved implicated with cryptocurrency. In some ways, it felt to me like one of the subtext for the previous hearings, the Libra hearings, was that they were trying to race ahead to the new thing when regulators really wanted to deal with the old thing, which was questions around antitrust. I think that we're seeing a little bit of this now. And I don't know how much we're going to get movement on kind of a

broader crypto regulatory regime while there's still those big outstanding issues of Facebook and Libra, which is, to some extent, you could argue that that's one of the bad things about having this come up in the way that it does. And I guess the last outstanding issue that came up is just this idea of regulatory clarity. So one chance that they definitely took a lot was that Circle has just moved its operations from the U.S. to Bermuda, citing lack of regulatory clarity. And it was interesting to hear them kind of ask what that meant. And, you know, two out of the three panelists, who are the two that were being asked most, made it clear, and I think in a way that resonated, at least to some extent, that it wasn't so much loose regulations. It was clear regulations.

They wanted, you know, businesses want to know how a jurisdiction is going to treat a particular type of assets because that'll, that's the bumper rails that allow them to figure out what they're going to do in terms of business model and in terms of everything else. And it's those bumper rails that clarity that that U.S. businesses in crypto and crypto assets don't have. So all of these were outstanding issues, but I will say, and just maybe we'll wrap it up here, that there is definitely a sense among these senators that a sense of inevitability of crypto assets. I mean, you had Mark Crapo, the chair of this committee, talking about how, you know, kind of echoing what we heard from Patrick McHenry a couple weeks ago, that it feels like it would be important.

possible to actually ban and preclude these assets. They're coming. They're coming whether regulators want them to or not. And so, you know, to the extent that we've turned a corner, I think it's in that acknowledgement. And that's a really, there's a lot that's good about that. There's a lot that's good about that feeling of inevitability and saying, we have to work with this to figure out how it's going to do. Now, I will say that to some extent that feeling of inevitability is not. Maybe for someone like Patrick McHenry, it's about Bitcoin and the network effect that's been created. For a few of these senators, it feels like that made me more about the idea that big tech is going to do ultimately whatever it wants. And at best, they're going to be

playing catch-up and kind of regulatory enforcement on the other side. So anyways, I would say wrapping up the day, this is still all in the context of big tech and Libra. That's the table stakes for the conversation we're having about crypto and crypto assets, like it or not. But if nothing else, at least these conversations are being had. And I hope they happen every week. I hope they have it in every couple weeks. I hope they bring in more voices. What did you guys think?

Let me know in the comments. Let me know in email or on Twitter at NLW. I'm really interested to see if you guys watched it and took different things away. And we'll see you tomorrow for another Crypto Daily 3 at 3. Peace, guys.