The Breakdown - Crypto’s Appetite for Legal Battles Is Growing

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. The breakdown is sponsored by nexus.com, near NFTX, and produced and distributed by CoinDesk. What's going on, guys? It is Friday, June 10th, and today we are talking about crypto, bringing the fight to regulators through the legal system. A couple housekeeping notes before we dive in. there are two ways to listen to the Breakdown podcast. You can hear it on the Coin Desk podcast network feed, which features the breakdown as well as other great Coin Desk shows and comes out in the afternoon, or you can wait a few hours for the show to come out in the evening on the Breakdown Only feed.

Starting point is 00:00:51 Wherever you're listening to the show, if you're enjoying it, I would so appreciate a five-star rating and a review. It makes a big difference. Lastly, a disclosure as always. In addition to them being a sponsor of the show, I also work with FTX. So this weekend you're going to hear some interviews that happen at the Consensus Festival, and so today I'm going to do a bit of the weekly recap style show, even though it's only Friday. Where I want to start is what appears to be an emerging theme, which is the crypto industry taking the battle to regulators in a more direct way. Custodia Bank, which used to be called Avanti, and which is headed by Caitlin Long, has sued the Federal Reserve.

Starting point is 00:01:28 Their accusation is that the Fed is unlawfully delaying a decision on Custodia's Apple for a master account, which is the way that banks access the Federal Reserve directly rather than going through an intermediary bank. The suit was filed in the District Court of Wyoming and accuses the Federal Reserve Board of Governors and the Federal Reserve Bank of Kansas City of delaying the application by 19 months. The suit says that the master account is critical to custodia's business and accuses the Fed of adopting standardless procedures that allowed them to, quote, act in complete secrecy whenever and however they choose. The suit says that a master account decision in the normal case takes five to seven business days and that the delay had, quote,

Starting point is 00:02:07 clearly violated the one-year statutory deadline for doing so. Now, this is something of an ongoing fight. In an op-ed in American banker earlier this year, Senator Cynthia Lemus wrote, Wyoming's special purpose depository institutions are the first attempt to responsibly integrate digital assets into the U.S. banking system and are entitled to access to the Federal Reserve's payment system as a matter of law. Even though Congress has imposed a one-year deadline on all Fed applications, nearly two years later, Wyoming institutions are still awaiting approval to access the payment system. Senator Lummis also questioned Jerome Powell about this during his nomination hearing. In many ways, this is really about the opacity of a system giving the body

Starting point is 00:02:49 that maintains that opacity, in this case the Federal Reserve, the ability to be somewhat arbitrary in terms of its decision-making. Julie Hill, a professor of law at the University of Alabama, writes, I've criticized the Fed's handling of account access requests. The process and standards are unclear. There is little transparency. Novel applicants often wait in limbo. The custodia complaint says that it hopes that master account litigation will bring sunshine to the Federal Reserve's process. So do I. George Selgin from the Cato Institute says it's one thing for the Fed to have strict conditions for granting master accounts, but quite another for it to just sit on applications forever so as to avoid having to justify its refusal. That's abusing its regulatory powers.

Starting point is 00:03:29 The other dimension of this story, though, outside the specific complaint, is this idea of a company in the digital asset space availing themselves of the legal system to try to force the issue. One of the bits of commentary I remember from the past from a number of crypto lawyers was that at some point, crypto companies who weren't getting guidance from groups like the SEC might have to actually force courts to decide on issues relating to, for example, token. and security designation. One other piece of evidence that this sort of legal challenge from the crypto industry comes from Grayscale, who are in the middle of trying to convert the Grayscale Bitcoin Trust into an ETF. This week, they posted to Twitter, as we enter the final month

Starting point is 00:04:08 before our response is due on our application to convert GBT to an ETF, we have retained Donald B. Varelli Jr., former Solicitor General of the United States as additional legal counsel. We want to ensure that we have the strongest possible team of legal minds ready to support our Bitcoin ETF application. Verrilli will serve as a senior legal strategist working alongside our attorneys in-house counsel. He's one of the nation's most experienced attorneys with a deep understanding of legal theory, administrative procedure, and the practical matters of working with the judiciary branch. Over the course of his career, he has argued more than 50 cases before the United States Supreme Court, including several that dealt directly with Administrative Procedure Act APA violations. We are thrilled

Starting point is 00:04:46 that he is joining our team as we work towards a positive resolution for investors and the general public. Now, the implications here are fairly clear, but Jake Chravinsky from the blockchain association helps spell them out. Strong move. Grayscale means business. The SEC's deadline to approve or deny the application to convert GBT to an ETF is July 6th. No doubt it should be approved. I don't see how the SEC survives a legal challenge if not, especially one led by Don Verilli. Mark your calendar. Now, I'm all for this, right? The legal system is ultimately just another path for figuring out complicated things. So this will be one to watch for sure. But speaking of the SEC, Bloomberg is now reporting that the SEC is formally investigating Terraform Labs over the U.S.T implosion, which is not unexpected at all.

Starting point is 00:05:32 They also reported on Thursday that Seoul Police are investigating allegations that staff of Terraform Labs embezzled the Bitcoin fund that was meant to help defend the UST's peg to the dollar. So all in all continues to be rough times in Terraland. nexo lets you easily buy crypto with your bank card and earn industry leading interest rates earn up to 16% on crypto and up to 12% on stable coins nexo makes passive income easy with interest paid automatically and daily with nexo you can also borrow against your crypto at zero percent apr and exchange over 300 pairs receive a welcome bonus of up to a hundred fifty dollars in bitcoin until june 30th at nexo dot io that's nexe This episode is brought to you by Mir, a climate neutral, high speed, and low transaction fee, layer one blockchain platform. Mir is a blockchain for a world reimagined. Through simple, secure, and scalable technology, Mir empowers millions to invent and explore new experiences. Business, creativity, and community are being reimagined for a more sustainable and inclusive future.

Starting point is 00:06:45 Reimagined your world today. at neer.org. The breakdown is sponsored by FtXUS. FtXUS is the safe, regulated way to buy and sell Bitcoin and other digital assets with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs.

Starting point is 00:07:16 When you trade NFTs on FTCX, you pay no gas fees. Download the FTX app today and use referral code breakdown to support the show. Now let's shift focus and discuss a few other things at the intersection of crypto and traditional finance and tech. An anonymous source says that Citadel is looking to build a new type of marketplace or liquidity ecosystem for crypto trading. The source says it's more of a crypto trading ecosystem or marketplace than in exchange. It's going to take on the exchanges by building a better mouse trap. They're doing this in conjunction with Virtue Financial as well as VC firms, including Sequoia and P. paradigm, and a later report from Bloomberg added that Fidelity and Charles Schwab are also involved

Starting point is 00:07:56 in the project. A Schwab spokesperson said that Schwab had, quote, made a minority passive strategic investment in a new digital asset venture. We know there is significant interest in this cryptocurrency space, and we will look to invest in firms and technologies working to offer access with a strong regulatory focus and in a secure environment. It's too early and the source is too incomplete to really parse much here, but again, of course, anytime you have an institution as big a Citadel moving into the space, it's something to pay attention to. To the tech side of things, now PayPal is finally allowing users to move assets off their platform. This, of course, is table stakes normally in crypto, but a lot of the companies that have come from the TradFi or Tech world into crypto have done

Starting point is 00:08:38 so with locked ecosystems. Jose Fernandez de Point, who is the senior VP of blockchain crypto and digital currencies at PayPal, said, quote, we are definitely responding to demand from users, that is one aspect. We've also been very vocal from the beginning that we're in this because we are a payments and commerce company, and we think that our role in the ecosystem is about increasing access. We have a ton of people now who have adopted the basic product, and as they grow, they want to do more things. So it's less about bringing sophisticated users from the outside. It's more continuing the learning curve for our base. Dan Held had a great summary of this. Both Robin Hood and PayPal eventually allowed deposit and withdrawal of crypto.

Starting point is 00:09:14 Customers don't want siloed experiences. This bodes well for the future of the space. Continuing our tour of big institutions, City is doing a lot of writing about crypto these days. One report has a conclusion that I'm sure you'll find absolutely shocking. Volatility, it reads, has affected user adoption. Tenitive evidence suggests a reduction in trading volumes in futures positions, but not wholesale declines in investor interest in the space. Certainly, I think this would dovetail with pretty much everyone's experience. However, PWC has a counterpoint which they tweeted just yesterday. Despite the volatility in the cryptocurrency sector, many traditional hedge funds are investing in

Starting point is 00:09:52 crypto, and more specialist crypto funds are being established as the digital asset class gains acceptance. Still, Mike Novagrats from Galaxy Digital said that of the some 1900 crypto hedge funds that exist right now, likely two-thirds of them will fail during this bare market. City also released a report about the Metaverse, speculating that it could represent a revenue opportunity as large as $13 trillion, a huge, huge number. The methodology of the report was to basically add together all internet-related revenue plus physical real-world activities that would be displaced by the Metaverse. The report identified five sections of Metaverse investment opportunities including

Starting point is 00:10:29 operating systems connecting people and content, blockchain that decentralizes economic systems and ownership of digital assets, natural user interfaces, eG voice control and gestures for greater user immersion, extended reality headsets, and cloud networking infrastructure. Now, candidly, this is a really expansive definition of the Metaverse, which isn't necessarily wrong. Still, it shows you how, call it, for informational purposes only these types of forward-looking assessments really are. As we start to round out, what about the macro world? Is there anything worth keeping an eye on there? The big thing that I've seen discussed more and more over the last week is inventories. Target's inventory is up 42%, Walmart, up 33%,

Starting point is 00:11:08 Home Depot, up 32%. Angel investor John McDonald says huge inventories piling up in the middle of inflation in an overheated economy is legitimately strange. Does this stuff need to be marked down, or did retailers actually buy stuff nobody wants? Now, there are many different theories on this, but the core and most often repeated is that when supply chains got backed up during the pandemic, sometimes customers tried double ordering, and as soon as retailers could, they ordered more than they needed so as not to be caught flat-footed. Ultimately, then, what we're seeing now would be a bullwhip effect in which small disruptions a while ago are causing larger dislocations now. Still, a key point of debate is how much of the buildup is also being driven by monetary policy

Starting point is 00:11:47 that is causing demand destruction. Jeffrey Snyder has been talking about this for months. Demand destruction plus historic inventory doesn't end with more inflation, he writes. It actually ends inflation. Media is having a ton of trouble trying to figure out what's going on with Target, and it's not just going to be Target. Chicago Tribune thinks Americans pivoted away from pandemic spending. No, Americans have been forced away from spending, period.

Starting point is 00:12:10 Snyder goes on to point out that this problem isn't over. There's still more inventory coming. At the same time, consumer spending habits are changing, meaning falling, the flood is still flooding. So if this is about fad policy and demand destruction, then obviously the implications are quite large. Kathy Wood from Arc has been beating this drum for a few months now as well. Kathy Wood said that the massive inventory pileups held by these U.S. companies is an indication that inflation will eventually die down. quote, I've never seen inventory surges like this in my career and I've been around a long time. This inventory issue highlights the cyclical reason we've been saying we think inflation will unravel.

Starting point is 00:12:48 Tax strategist Macias Maca Bonelli wrote, I know that many people have criticism of her, but for three months, Kathy has been harping on inventories and how the Fed should slow up this tightening because of them. So Will would be proven right. Add it to the list of macro questions that are going to shape the discourse over the next couple months. For now, I want to say thanks again to my sponsors. nexo.io, near and FtX. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Crypto’s Appetite for Legal Battles Is Growing

There aren't comments yet for this episode. Click on any sentence in the transcript to leave a comment.