The Breakdown - Crypto Won the Election. Now What?

Episode Date: November 17, 2024

A reading and discussion inspired by https://www.coindesk.com/opinion/2024/11/13/the-real-winner-of-the-2024-elections-the-crypto-industry/ and https://www.coindesk.com/opinion/2024/11/12/time-for-crypto-to-put-the-pedal-to-the-floor/ 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, November 17th, 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 in the show notes or go to bit.ly slash breakdown pod. All right, friends, back with another crypto election related LRS. It's pretty much still what everyone's talking about, especially as Bitcoin has had such a monster week. But there are some really interesting themes here. We're starting to get away from just the, wow, this is great, into the specifics of how it's great and what we need to do next. And both of our pieces today are on those themes. The first comes from front of the show Christopher Perkins, who writes the real winner of the 2024 elections, the crypto industry.

He talks about five areas that stand to benefit. Let's kick it over to an AI version of myself for. this essay. For the crypto industry, the elections in 2024 were a game changer. With 287 pro-crypto members of Congress and a president-elect who has proclaimed that the U.S. will be the crypto capital of the planet, the industry is poised to be on an accelerated path toward mainstream adoption. As market participants digest the potential impact, one thing is certain, a pivot from regulation by enforcement to a regulatory regime where clear, transparent, and predictable rules are prioritized will be a major unlock for the space. The inevitable regulatory derisking that will follow will open the door to a new class of markets, products, and applications.

Here are some verticals that could thrive in this new environment. One, decentralized finance, defy. Defy is one of the most exciting crypto-powered innovations where applications deploy smart contracts to replace intermediaries, offering universal access to trading, borrowing, lending, and myriad other financial services. To date, regulators have remained steadfast in their insistence that intermediaries must be required, undermining the fundamental innovation of Defi. A favorable regulatory climate will change this. A clear regulatory framework could also pave the way for token holders to compliantly share in protocol revenue, something long sought by industry participants. Two, artificial intelligence, with artificial intelligence, AI, exponentially accelerating

and AI agents arriving years earlier than expected, the openness, transparency, scale, and even at proof of personhood achieved by integrating crypto and AI could pave the way for responsible innovation across both technologies. Three, fixed income markets. Interest rates are the backbone of traditional financial markets. Nacent fixed income markets are poised to grow as financial institutions, now facing less regulatory resistance, enter global crypto markets. Benchmark yields like the composite ether staking rate, CESR, and perpetual.

swap funding rates will bring the utility of the $500 trillion interest rate swap market to the crypto space, appealing to hedgers and speculators alike. 4. Utility tokens. During the SEC's regulation by enforcement regime, tokens that demonstrated utility were often targets for enforcement. As a result, meme coins, tokens with no utility, flourished. A favorable regulatory climate could refocus the market on utility, something that could fuel additional mainstream adoption. 5. Decentralized physical infrastructure. Depin. DPN uses the incentivization of tokens to drive mass community participation, allowing for the creation of large decentralized physical networks.

Across telecommunications, mapping, computing, and geolocation industries, these networks are providing more scalable and cost-efficient solutions than their centralized peers. Trump 2.0 and the bipartisan pro-crypto Congress will usher in a brave new world for the crypto industry, A regulatory environment that encourages innovation, rather than stifles it, will finally give institutions the confidence to enter the market. And entrepreneurs, no longer shackled by the threat of regulatory sanction or personal liability, will be free to focus on building. The future could not be brighter. Next up, we turn to a second essay, this one by Aaron Brogan, called Time for Crypto to Put the Pedal to the floor. Now, this reflects a theme that I've been really seeing a lot this week, so let's turn it over once again to AI to read this,

and then I'll be back to discuss where I think it fits in the current conversation. In the wake of the U.S. presidential election, I was reading various roundups and postmortems when one article here at CoinDesk stood out as particularly good. EY professional Paul Brody argued that blockchain's path to success lies in the extreme competition that it fosters. Brody compares blockchain to the slow ascendancy of voiceover IP, VoIP, writing, despite the Internet's inherent drawbacks, it has come to dominate communications because it is cheap, widely available, and internet communication services are intensely competitive.

Frankly, I think the comparison is inspired. I couldn't help but feel that Brody glossed over one crucial piece of the equation, though. With respect to VoIP, he writes, the entire cycle of deregulation, monopoly breakup, reconfiguration, and shift to internet and mobile took place over 20 years. This comparison treats deregulation as a foregone conclusion, but I think it is actually the crucial blocking issue of our time. Since January 2021, One, Securities and Exchange Commission chair Gary Gensler has implemented policy to stifle cryptocurrency's development. Now, with Donald Trump ascendant, the industry can expect a new SEC chair and new policy.

But that will not be the end of the story. Regulatory arbitrage. The truth is, deregulation is not something that happens on its own. Cryptocurrency's value depends in large part on achieving it. These next four years will provide an opportunity to do so, but we should expect a battle. Here's why. Capital markets in the United States have been regulated by essentially one regime for nearly a hundred years. In the wake of the Great Depression, a series of

legislation created the SEC and empowered it to implement certain requirements for companies seeking to raise public capital. This full array of securities regulation included the obligation to publish a prospectus, ongoing reporting requirements, and the requirement that certain financial intermediaries be registered as broker-dealers or national security exchanges. Each aspect of this regime may be justifiable consumer protection, but the result of it altogether is that accessing public capital markets is prohibitively expensive for all but the largest businesses. The accounting firm, PWC, estimates the average cost of even the smallest public offerings as between $2 and $12 million. Ongoing compliance is similarly expensive, such that even the

SEC has recognized that the disclosure requirements place a disproportionate burden on smaller reporting companies in terms of the cost of compliance. There are a number of exemptions that allow the sale of so-called exempt securities, including Reg D, Reg A, and Reg CF. But these regime seriously limit secondary market liquidity and access to secondary markets is a crucial component to attracting primary investment. The result is a drag on the real economy, so much that the management consulting firm McKinsey and Company identified access to working capital financing as a limiting factor in the productivity of American small businesses. Cryptocurrency was a technological development, but the effect of that development was to create regulatory arbitrage.

Without the old sclerotic restraints, the fresh capital markets that cryptocurrency exposed exploded almost immediately. In 2018 alone, cryptocurrency firms raised $20.3 billion in token offerings. Compare this to the anemic $500 million raised in Reggie CF offerings in 2023. The difference was not just in the primary issuance. Secondary cryptocurrency markets were incredibly liquid almost immediately, which likely helped projects raise funds. Although many companies that conducted initial coin offerings in 2017 and 2018 failed and lost all value quickly, a number of projects funded in this boom subsequently experienced sustained increases in value. PolkaDOT DOT raised $65 million in a public token sale in 2017, and now has a market cap of nearly $7 billion. Solana, SOL, raised $1.76 million

in a 2020 public token sale at a price of $22 per token, which is now appreciated more than $900x to $198.89 per token. Chain link, link raised $32 million in a 2017 ICO priced at 11. cents per token, which has since appreciated 123 X to $13.56 per token. Even though crypto has its boom-bust cycles, Chair Gensler's 2021 ascendancy cast appall over the industry independent of the usual volatility. Just look at the CoinDesk 20 index of the largest cryptocurrencies, only one launched after January 2021. Looking back now, this regulatory intervention makes sense. If the greatest power of cryptocurrency is to create plausible methods to avoid over-intrusive regulatory requirements, then its existence is a direct challenge to regulators' power.

Cryptocurrency and the American economy as a whole are not zero-sum competitions. When crypto projects and small businesses succeed, we are all enriched. The competition between the SEC and the cryptocurrency industry, on the other hand, is zero-sum. Either the SEC can ban these markets, or cryptocurrency projects can access them. Both cannot be true at once. The years ahead. Now, Donald Trump has promised to lift the implicit ban on crypto projects that the rules will be written by people who love your industry. The industry is rightly cheering his election

as a bullish indicator. But hold off on the victory lap. This is just the beginning. When you recognize that crypto disempowers the SEC, it is obvious that the agency will never give up freely. Whoever Mr. Trump picks as SEC chair will be friendlier to the industry than Chair Gensler by default, but they will have the same incentives to preserve authority. And four years from their appointment, they will be gone and anyone could take their place. What the crypto industry won on Novi 5 then was a chance. From now until January 20th, 2029, we have to push the pedal to the floor to ensure that whoever comes next at the SEC can never disempower the industry again. The way I see it, that task is two-pronged. First, the industry has to continue to expand retail adoption to gain enough

consumer support that it is indispensable. When Uber's feet were being held to the coals, it was retail customers' messages to politicians that saved it. Crypto is the natural sector to repeat this playbook, so our value proposition to the retail voter should be undeniable. Second, we should work with our new allies in Washington to implement a legislative solution to permanently inculcate cryptocurrency as a regulatory third way. There can be no half measures. Only Congress can build a foundation beyond the reach of future regimes. All right, so pedal to the floor. Boy, if you look at the news from this week, Coinbase listing Pepe and all of these crazy ETFs being filed, it is very clear that the industry is on this same wavelength. I tend to think that in the wake of the insane battles that

we had to face during this last cycle. The crypto industry appreciates more than ever that it does not have a moment to waste in this positive regulatory environment. Quite soon, we're also, I think, going to have to face the reality that crypto, while no longer a target of the White House, still has to compete with everything else when it comes to political priorities. And so the time to push hard on everything that's necessary when it comes to crypto regulation is now. It's going to be a fascinating dynamic time. And like I said, I don't think companies in this space are going to waste a single minute of it. For now, though, that will do it for the breakdown. Appreciate you listening, as always. And until next time, be safe and take care of each other. Peace.