The Breakdown - Crypto Reacts to the Lummis-Gillibrand Stablecoin Bill

Starting point is 00:00:04 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, April 18th, and today we are talking about a new stable coin bill from Senators Lammis and Jilla Brand. 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.L.Y. pod. Hello friends, some interesting regulatory news today. Senator Cynthia Lummis and Kirsten Gillibrand have published a new stable coin draft bill for consideration in the Senate. By way of background, these two are a bipartisan team that has also previously introduced comprehensive

Starting point is 00:00:55 crypto legislation. Some of what I think is the smartest comprehensive crypto legislation ideas that we've seen. Of course, it being the environment that we've been in, it didn't go anywhere, but the hope was always that different pieces of that bill might find their way into more individualized and passable specific legislation. So what did this one come with? Well, rather than simply mirroring the House bill, this proposed legislation has some major differences which would need to be reconciled before any laws were passed. And before digging into the details, it's worth noting how different the tone is around this bill and how it's being presented. Lemisagilabrand wrote a short op-ed piece to introduce the bill and present their reasoning for why Stablecoin

Starting point is 00:01:34 legislation is necessary. They wrote, As the global financial leader, the United States finds itself at a crossroads. We can either be the central player in managing a new generation of financial technology, promoting dollar dominance, protecting consumers, and preventing illicit finance, or we can leave it to other countries to provide a framework for us. Leaving it up to other countries would be a grave mistake. The United States must have a seat at the table. Of course, if you listen to me at all talk about this, you've heard this same narrative

Starting point is 00:01:58 around promoting the use of the dollar in the digital age, but it's been pretty rare to hear that repeated in Washington. So what about the provisions of the bill? Well, let's start with the straightforward measures. The bill prohibits algorithmic stable coins. Full stop. On the one hand, this is pretty understandable after the very public failure of Luna UST, but as many are noting, the definition seems broad enough to prevent other novel structures like Die from gaining approval in the U.S. as well. Issuers are required to maintain one-for-one reserves in high-quality liquid cash equivalents with an obligation to redeem tokens into dollars. Monthly reserve attestations and annual

Starting point is 00:02:31 audited financials must be filed, and issuers are also required. to implement anti-money laundering provisions and comply with sanctions. At this point, these measures are table stakes on any stablecoin regulation, so they come as no surprise. One wrinkle on this point, though, it's not clear whether compliance would be required for every on-chain transaction or just creations and redemptions. That would likely come down to how regulations are enforced, but it highlights the risk of imposing a huge compliance burden. Where the bill gets interesting is in designating which entities can issue stable coins and how they will be supervised. The legislation allows state and federal banks to issue stablecoins under their existing charter.

Starting point is 00:03:05 It also allows state-regulated non-depository trust institutions to issue stablecoins up to a $10 billion market cap. The bill provides that stable coin issuers will be regulated by state and federal agencies as appropriate, but two things stand out here. First, Circle doesn't have any of these corporate structures in place, so we'd need to seek further licensing to continue operating. That's not impossible. Paxos, for example, has a limited purpose trust charter in New York State, but if regulators are hesitant to hand out new licensing, this could disrupt Circle's business. Secondly, this is a large departure from the way the House bill licenses stablecoin issuers. This bill essentially turns stablecoin issuers into a limited type of bank. Llamis and Gillibrand in fact stated this was an explicit goal of the legislation.

Starting point is 00:03:43 By allowing space for both state and federal banks to participate, the bill seeks to, quote, preserve the dual banking system. Another big difference here is that insolvencies of stablecoin issuers will be dealt with by the FDIC. The bill establishes a new regime for dealing with stablecoin failures, but it seems in line with the way that bank failures are dealt with. And putting stable coins within the FDIC insurance umbrella seems like a big ask for skeptical Democrats. Overall, the bill seems a bit less like a straightforward ratification of existing stablecoin businesses and more like a reshaping of the banking system for the digital age. Whether that the right or the wrong approach, it is certainly a

Starting point is 00:04:15 more ambitious approach than the House Stablecoin bill. Lummison-Gillibrand have been working on this bill for months and seem to think it's the correct way to go about this type of regulation. In a statement, Gillibrand said, to draft the strongest bill possible, our offices work closely with the relevant federal and state agencies, and I'm confident this legislation can earn the necessary support in the Senate and the House. Hello, breakers. Today's episode is sponsored by Ledger. As another cycle ramps up, it's another chance to think about your Bitcoin custody best practices, and of course, to help all the new folks do the same.

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Starting point is 00:06:29 later this year, potentially even after the election. It would be paired with marijuana banking reform, which is an important cause for Brown. The sticking point will be that Brown is asking for some changes to enhance consumer protection and compliance safeguards. It's not clear yet whether those demands are workable. Jake Chravinsky, the chief legal officer at Variant Fund, was very unimpressed, tweeting, Stablecoin legislation should be a top priority for everyone who cares about crypto policy, but the bill published today is deeply flawed. It appears to ban nearly everything except a narrow band of centralized custodial stablecoins. That would be far worse than status quo. One year ago,

Starting point is 00:07:01 I testified in Congress on the question of how stable coins should be regulated in the U.S. In my testimony, I outlined five principles that any workable piece of legislation must follow. The main principle was focus on custodial stable coins. Today's draft bill violates that principle. Instead of setting out reasonable requirements for custodial stable coins, the bill picks winners and losers and puts an end to innovation. Regulatory clarity is good. Anti-competitive regulatory moats that kill innovation are not. Austin Campbell, the founder of Zero Knowledge Consulting and former Reserve's portfolio manager at Paxos, wrote an extremely wonky thread critiquing the bill. His big objection was that the bill doesn't allow stablecoin issuers to deal overnight

Starting point is 00:07:37 reverse repurchase agreements, a key liquidity tool during times of financial stress. Campbell had other technical issues with the way that reserve requirements were described in the bill, but his main takeaway was, quote, there are catastrophic basic failures within these bills that I know are based upon things that folks in the crypto industry are asking for. The issues should be straightforward to correct, but Campbell's critique was that while advising on these bills, the crypto industry needs to make sure they are technically precise. He wrote, Should we be taken seriously if we can't understand fix and advocate for these things? No, banking lawyer and noted crypto critic Todd Phillips had some major issues with the bill as well,

Starting point is 00:08:10 but largely because it's too disruptive. Phillips called the bill a, quote, practical death sentence for Circle and Paxos, and wondered why this level of scrutiny hasn't been applied to large money transmitters like PayPal. When it was suggested that Circle and Paxos would need to be converted to banks, Phillips added, I don't see how they could convert, but perhaps could be purchased by banks. The whole setup is strange, though. The benefit of being a bank is that you can get huge leverage with deposits, but the stable coins here aren't debt instruments. He later noted that there is a clear path to convert into Wyoming's special purpose depository institutions, which he thought was likely the intention of the bill. So as you can see, the general commentary

Starting point is 00:08:43 is fairly negative from a bunch of different sides. To the extent that there are bullish takes, a lot of it was summed up by this tweet from Ryan Berkman's. He wrote, My initial read is that the bill is extremely bullish and legitimizes Ethereum. Berkman said the good is that this broadly legitimizes stable coins on public chains in America. 59% of all stable coins are minted on Ethereum, rising to 93% when excluding centralized Tron. So this bill makes Ethereum open for business like never before. He also points out that this quote opens floodgates for U.S. banks to obtain stablecoin licenses and for certain private companies like Fidelity to issue up to $10 billion in stable coin without a license.

Starting point is 00:09:17 Still, even he notes that, quote, Circle appears to have lost a political battle against the banks. The bill seems to require Circle to become a bank and then obtain a stablecoin license, or else Circle might possibly mint only $10 billion USDC hard cap as an unlicensed non-depository trust company, if Circle even qualifies as this. So clearly a lot to watch for as this bill evolves. Another interesting regulatory story, the former head of SEC's crypto litigation unit, Ladon Stewart, made her first public speaking appearance

Starting point is 00:09:43 since leaving the agency. Stuart led the Coinbase litigation among other cases, but now has moved on to private practice. She joined global law firm White and Case to build up their crypto division, seeking to represent the industry against her former employer. The event was hosted by Columbia Business School on Wednesday night, and during the panel, Stewart sparred with Polygon chief legal officer Rebecca Reddick and DLX law co-founder Lewis Cohen. Stewart was limited in her ability to speak on specific cases she had been involved with, speaking more towards the SEC's attitude towards litigation. However, she confirmed that a recent minor win in the Coinbase lawsuit would likely emboldened the agency. She said, it's probably going to give the SEC that sort of comfort it needs

Starting point is 00:10:19 to proceed as it has been. It's not going to back off from bringing regulatory cases in the crypto space. Many expected Stewart to take an industry-friendly stance, however, she appeared to defend the SEC's action and novel legal theories. She claimed that existing securities laws are sufficient to cover crypto. However, she acknowledged that some of the ongoing cases will likely make it to the Supreme Court, settling exactly how a crypto token can be defined as a security. A tense moment came when the panelists discussed this point further. Stewart leaned into the recently developed SEC theory that the crypto ecosystem, not the token itself, is the investment contract, which makes the industry subject to securities law. Reddick used that opening to ask, but then what do you register?

Starting point is 00:10:54 If the industry wants to come into compliance, what gets registered? Stuart claimed this was out of her area of expertise as an enforcement litigator, but said firm should register, quote, all the stuff around the token. She added, you can't obviously register all the stuff, but you can register the token. Unsatisfied with the answer, Reddick responded, but we agree that's not the security and that's not the investment contract either. This is, I think, where the industry and the SEC have this divide, which is tell us what to do, and it's hard to know. A gruff Cohen added, it's impossible, it's not hard. Coinbase chief legal officer, Paul Grewell, once again highlighted the absurdity of the

Starting point is 00:11:26 situation, tweeting, just register the token, but not necessarily, quote, all the stuff around it, or suffer lawsuits in case law in the meantime that are so muddled that they require the Supreme Court to provide definitive clarity. This is your government at work. Lastly today, Senator Elizabeth Warren continues to ramp up her anti-crypto letter writing campaign. This week's letter is addressed to Treasury Secretary Janet Yellen and once again discusses the need for tighter anti-money laundering and sanctions compliance within the crypto ecosystems. The focus this time is on stable coins, with Warren claiming that, quote, bad actors exploit those financial channels to both evade sanctions and receive a limitless stream of untraceable income. Warren argued that any stablecoin legislation

Starting point is 00:12:02 needs to include, quote, the full suite of AML tools that Treasury requested. Until now, Warren has been pushing for standalone bills to address crypto AML, but it seems now she is advocating for these tools to be inserted into other bills. To get more specific, Warren has been calling for AML compliance to be required for crypto infrastructure. She is now claiming that, quote, excluding miners, validators, and other intermediary nodes in the defy system from the stablecoin legislation's AML requirements, would allow bad actors to profit from the increase in crypto trading that stablecoin legislation would provide. She argued that, quote, crypto assets issued over public blockchains are highly unlikely to be consistent with safety and soundness

Starting point is 00:12:36 principles. She referenced the Fed rejecting an application from Custodia Bank, but it seems like Warren is beginning to push back on stablecoins purely because they operate on public crypto rails. Although the letters continue to fly off Warren's desk, some noted they're starting to look a little more desperate. Late last year, for example, Warren managed to gather up almost 20 senators to support her crypto-a-m-m-l bill that contrasts with this letter which didn't feature a single co-signer. Still, if you think that she is likely to stop writing these letters, which appears to be her or her office's favorite activity, I don't think that's likely to happen. Anyways, guys, that is going to do it for today's breakdown. Big thank you once again on my

Starting point is 00:13:11 sponsor for today's show. Check out the Ledger Bitcoin Orange Nano. 5% of sales go to support Bitcoin development. Until next time, be safe and take care of each other. Peace.

The Breakdown - Crypto Reacts to the Lummis-Gillibrand Stablecoin Bill

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