The Breakdown - Crypto: It's So Over. We're So Back.

Episode Date: August 27, 2023

On LRS, NLW reads excerpts from and analyses: How PayPal Upended the Crypto Debate in Washington D.C. - John Rizzo The End of the End of Crypto - Daniel Kuhn Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to 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 Sunday, August 27th, and that means it's time for Long Read Sunday. 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 at the show notes or go to bit.ly slash breakdown pod. Hello, friends. Well, today our theme is where we are in the cycle. I think we are in a very transitional moment, and both of the pieces today have something to do with exactly that. The first is by John Rizzo, the senior vice president for public affairs at Clyde Group,

and was featured on Coin Desk on August 16th. The piece is titled, How PayPal Upended the crypto debate in Washington, D.C. John writes, As the end of July arrived, House Financial Services Committee Republicans achieved its goal of passing a bipartisan Stable Coins bill. Still, they left D.C. without the broad bipartisan vote, Chair Patrick McHenry had labored to achieve. The session ended with new recriminations over old disputes, namely the degree of federal versus state regulation in a new regulatory framework, casting a dark cloud over the prospect of legislation that could garner support from McHenry, ranking member Maxine Waters, and the Biden White House. And then PayPal and Paxos entered the chat.

The surprising unveiling of PiUSD may be the accelerant needed to forge compromise in DC and bring about the legal enshrinement of a comprehensive regulatory framework for stablecoins. It may also represent a new, more aggressive strategy for how American fintech companies deal with the federal government and DC regulators. Now, Rizzo continues to explain just why it's such a big deal. There are a couple parts to that. First, he says, the sheer scale of PayPal's reach is really significant. As he puts it, with the flip of a switch, hundreds of millions of users can access and transact

in stablecoins through a service with which they are already familiar. But the second piece is the contrast to Libra, which obviously became DM, which was meta, then Facebook's failed stablecoin project that was announced all the way back in 2019. Rizzo writes, had it succeeded, DM would have presented two challenges, which were discussed publicly at the time for the federal government to wrestle with. Libra's stablecoin would have launched when the U.S. lacked a comprehensive regulatory framework for stablecoins, meaning it would exist in a legal

and regulatory gray space. Beyond that, he writes, its regulatory challenge would have been turbocharged by the fact that Facebook's billions of users would have had access to this sort of regulated, sort of not regulated crypto token overnight. Now, while PayPal is not at the scale of meta and Facebook, Rizzo says, it is at a scale that creates a new urgency to actually reach a compromise and figure out a regulatory framework that is workable. And as he points out, that pressure didn't exist when only a handful of Democrats broke rank to vote in favor of McHenry's Stablecoin bill. As he puts it, Democratic policymakers in D.C. who resisted McHenry's Stablecoin's bill in search of a better deal must account for the prospect that Stablecoin adoption and

usage could speed up rapidly soon, heightening some of the risks that D.C. policymakers identified when assessing Stablecoin regulation. Interestingly, Rizzo also points out that PayPal is operating in an area where the federal government's ability to intervene is actually someone. want limited. The piece continues, forcing financial policy innovation without the pre-approval of regulators is daunting, unless you operate in the one area of financial services primarily regulated by states. That's PayPal's ace in the whole. It's the reason it could partner with Paxos trust and change the pool of potential stablecoin users overnight. Its core business, money transmission, is regulated through a state-by-state licensing regime, meaning the federal government's ability to

impose a cost on PaiUSD's backers for launching a stable coin without seeking prior approval is limited. Basically, Rizzo's argument is that in this launch, PayPal claimed power instead of asking for permission. He concludes, having observed power up close during 14 years of federal service, achieving a result in D.C. is not always about winning the competition of ideas. Instead, influencing power is about power and leverage. Supporters of stablecoins and market participants now have leverage over the federal government in a way that didn't exist weeks ago. It could grease the wheels for a comprehensive regulatory framework for stablecoins in Congress and begin an era in which American crypto companies force the federal government to deal with them on their terms.

All right, so that's piece number one, and instead of discussing it alone, I'm going to read the second piece and then we'll talk about them both together. The second piece is by Daniel Kuhn, also on Coin Desk, and has the great title, The End of the End of Crypto. Daniel begins, trying to figure out whether crypto is here to stay isn't as simple as tallying up the industry's wins and losses. For a while there, it genuinely seemed possible that the USSEC could wipe crypto off the map. Then again, there's practically a cottage industry of people who've made it their business to count all the times Bitcoin or crypto supposedly died. However, as Daniel notices, it seems like the overall mood of the crypto scene has shifted. Daniel writes,

beginning with BlackRock's surprising move into the realm of crypto ETFs and running through PayPal's just launched stablecoin, it seems like most of the major crypto news headlines are pointing a way forward. Daniel also points to Ripple sort of winning, SPF going to jail, and 3AC getting sued once again. So Daniel asks, is the bottom in? He's not sure, but he does point out that, quote, now that the SEC has finally unloaded its worst against sector giants, finance, and Coinbase, Fed now didn't siphon off all interest in crypto and meaningful legislation has passed never before seen hurdles. It seems like the worst is over. So what are the risks that remain? Daniel points out things like the proposed custody rule changes that could put crypto in a hostage situation,

DCG's Bitcoin Trust unraveling, and zooming farther out quantum computers that could one day break cryptographies back. As he says, there's likely plenty of tail risks and black swans and bitter ends ahead. However, as Daniel says, at this point, it seems clear enough now that Bitcoin is battle-tested, and while governments may want to step up oversight of crypto, the real anarchic core of all of this is basically untouchable. There is a technological force loose in the world that enables completely permissionless transactions, and that inspires others to build and build, creating a functionally self-perpetuating loop. So, okay, these pieces go together, both I think under the theme of the title of the second one, the end of the end of crypto. And why I think this is

such a compelling title is that in the period after the collapse of FTX and the unveiling of the fraud of SBF, this industry was on very, very fragile footing. I hardly need to say this to you guys, as you've all lived through it, but between Operation Chokepoint 2.0, de-platforming from banks, the ceaseless grind down of prices, one could be forgiven for losing some amount of hope. Now, of course, for those paying close attention, not all that much hope was actually lost. People were fighting fiercely against government overreach, builders were still doing all sorts of weird things, and of course, Bitcoiners didn't care really what anyone else thought. And yet, from the outside looking in, we have just gone through a two-part inflection point moment.

The parts are exactly what Daniel pointed out. on the one hand, BlackRock planting its flag, which, by the way, was reinforced by BlackRock CEO Larry Fink on national TV a number of times, and then PayPal exerting its influence, which was of course the subject of the first piece we read. These aren't crypto-native companies rising up. These are traditional finance companies coming back in, or rather saying they never left and that they believe more people are coming in the future. It might not have mattered to those who are still here listening to the breakdown this many months into the bare market, but for the people outside who will bring new energy and new capital into the space, these things are signals,

and they're big ones. And so, yes, I believe it is true. We have had and experienced the end of the end of crypto. Until next time, be safe and take care of each other. Peace.