The Breakdown - Democrats Gear Up for Fight Over Crypto Market Structure Bill

Starting point is 00:00:00 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 Tuesday, August 12th, and today we're talking about the Dems gearing up for a fight on the market structure bill. 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. We're going to bit.ly slash breakdown pod. All right, friends, today we are talking about the latest political machinations around the

Starting point is 00:00:42 crypto-regulatory agenda. However, we have to start quickly with a 2022 closeout sort of story. TLDR, Doquan appears to be pleading guilty to fraud. On Monday, the judge overseeing Doquan's criminal case arranged a hearing for Tuesday. He placed a note on the docket stating, The court has been advised that the defendant may enter a change of plea. The defendant should be prepared to give a narrative allocution that incorporates all elements of the offense, to which the defendant is pleading guilty. After over two years of fighting extradition, Kwan was returned to the U.S. to face charges over the collapse of Luna in January. He entered a not-guilty plea on nine fraud charges shortly after landing in New York.

Starting point is 00:01:20 It appeared we were set for another lengthy crypto trial as Kwan defended his actions. Now, I am recording this before the case conference has wrapped up, but every indication is that Kwan will give up on fighting the charges and take a plea deal. It's unclear what kind of sentencing Kwan will see. The charges carry a maximum of 120 years in prison, but many of the charges are alternative, so in practice, the likely sentencing is much less. In previous court filings, Kwan's legal team applied to delay the case moving forward, stating that, quote, productive discussions were taking place with prosecutors. By way of comparison, Alex Mishinsky, the CEO of Celsius, received 12 years for similar fraud charges

Starting point is 00:01:54 in May. The court heard that Mishinsky's crimes led to $4.7 billion in consumer funds being inaccessible on the failed platform. Sam Bangman-Fried, of course, received a 25-year sentence, connected to around $9 billion in customer and investor losses. In contrast, prosecutors are alleging that the collapse of Luna, quote, erased over $40 billion in investor assets, causing devastating losses to countless investors in the United States and around the world. Now, that's roughly the total market cap of Luna and UST at the time of collapse, so is pretty inflated. But Kwan will still be framed as causing much more harm than either Mishinsky or even SBF. Sentencing won't take place until later, but there is the potential, at least, that Kwan will face a tougher punishment

Starting point is 00:02:32 than even his contemporaries. For most observers, this is a book-closing moment on the endemic fraud that brought down the last cycle. Meanwhile, in this cycle, it's all about actual legitimate political battles. Over in the Senate, Democrats are setting up to fight the crypto market structure bill when Congress returns in September. On Sunday, Elizabeth Warren launched her new set of talking points during an interview on MSNBC. She said, look, we need crypto-regulation, but we don't need the regulation written by the crypto industry. We need regulation that limits the corruption and the ability of elected officials to trade in it. That also limits the ability to blow up the economy with crypto. That also limits the ability of folks like terrorists and drug

Starting point is 00:03:10 traffickers to be able to use it as their currency. And also that has adequate consumer protection. Right now, what we've got is weak, weak restrictions in this area. Justin Slaughter, the VP of Regulatory Affairs at Paradigm, recognized a bit of a shift, tweeting, noting that it's good to see Senator Warren embrace the idea of crypto-lating. legislation is necessary. Part of this clip I find most noteworthy is that she doesn't critique the now enacted genius law, but instead focuses on what she wants to see in market structure legislation. And the point that he's making is that so far, Warren has attempted to stop crypto legislation in its tracks, arguing that the current securities laws are enough. The new framing then is a big

Starting point is 00:03:47 shift. And while I don't expect Warren to put forward her own thoughtfully constructed alternative bill, the discussion starting from the position that crypto legislation is necessary is not nothing. On Monday, Democratic staff of the Senate Banking Committee released their fact sheet on the market structure bill. This is a response to the version sponsored by Cynthia Lummis, which introduces the idea of ancillary assets that are neither security nor commodity. Democrat staff argued, most concerningly, the bill provides a superhighway for traditional assets to escape the SEC's authority simply by converting stocks and other non-crypto securities into tokens. Now, interestingly, this is a critique that's been raised in some corners of the crypto industry as well. Lummas'es' bill

Starting point is 00:04:24 describes ancillary assets as crypto tokens that don't give rights to investors, such as the right to vote on governance or receive a share of the profits. Last month when the bill was released, Crypto lawyer Gabriel Shapiro wrote, Rights are not a good policy dividing line as everything you can do with rights and duties, I can do with incentives and powers. Crypto has taught us this. Something should not be regulated based on whether there is a right to a dividend. There may be a reasonable expectation of something almost exactly like a dividend, which places the expector in the exact same position from a policy perspective as someone who has a right. In fact, it places them in an even more vulnerable position

Starting point is 00:04:56 than the person with the right, and therefore more in need of protection, not less. This is the entire reason why the Howey test is built around reasonable expectations rather than rights. Now, Democrat staffers argue that this is a loophole that needs to be eliminated, continuing, even for Americans who invest in non-crypto companies, this would mean exposing their retirement accounts and investments to greater volatility while stripping away existing federal and state enforcement tools to protect and help investors who get scammed. Now, I think most of us agree that if this bill were passed, it seems unlikely that major U.S. companies would all of a sudden start issuing crypto tokens instead of stock to get around regulations. Market forces would almost

Starting point is 00:05:31 certainly ensure that investors are still offered stock with actual ownership rights. But it's not unreasonable to contemplate the issue and attempt at least to tighten up definitions to prevent this particular issue. At this stage, it's difficult for many to believe that Senate Banking Committee Democrats are actually engaging in good faith. This is the criticism they have chosen to level, but in its absence, I'm sure they would have found another point of attack. As the ranking member of the banking committee, Warren is setting the agenda and controlling the talking points. Mostly the news just signals that Warren is gearing up for a fight over the market structure bill. The bill does have thornier issues than even the Genius Act, so there is a genuine need for

Starting point is 00:06:05 good faith debate over the specifics. Hopefully, Senator Warren comes to the table and offers a reasonable alternative, given that she now acknowledges the need for crypto legislation, but I certainly won't be holding my breath. Today's episode of The Breakdown is brought to you exclusively by Grayscale. Grayscale is almost certainly a name you know. They've been offering exposure to crypto for over a decade now and offer over 20 different crypto investment products, ranging from single asset to diversified to thematic exposure to crypto and the broader crypto industry. They have long been innovators at the intersection of Tradfai and Crypto, and one of the benefits for a lot of us is that Grayscale products are available right through your

Starting point is 00:06:47 existing brokerage or IRA. Now, of course, investing involves risk, including possible loss of principle. For more information and important disclosures, visit grayscale.com. Go to grayscale.com to explore their full suite of crypto investment products and invest in your share of the future. Speaking of the Genius Act, with the Genius Act now in force, tension shifts to what regulated stablecoin markets will look like in practice. You might remember that one of the central elements of the Genius Act was a prohibition on yield-bearing stablecoins. This provision didn't seem to come from an investor protection concern or align with market demand. Instead, it was viewed as a concession to the banking lobby, protecting their zero interest accounts from

Starting point is 00:07:27 competition. According to Will Beeson, a former standard chartered executive turned crypto founder, that protection is unlikely to work. We've already seen a few workarounds with Coinbase, PayPal, and others offering rewards on stable coin deposits rather than native yield. Beeson believes this trend is going to go even further as stablecoin issuers fight for market share. He said, With yield-bearing staple coins off the table, institutions need a compliant way to earn yield while staying liquid. Capital is already shifting. Beeson believes that defy yield is the natural next step, adding, institutional holders aren't going to sit on idle depreciating assets. They'll demand yield and infrastructure that makes accessing it compliant. The next phase isn't about holding idle stable coins,

Starting point is 00:08:06 it's about programmatic access to risk-free yield, and the ability to move between cash and high-quality assets at will. Beeson expects the lack of yield to drive demand towards on-chain real-world assets as the next step. On the other hand, Nick Cannon, the VP of Growth at Gauntland, believes that the lack of yield will quickly make Stablecoins a commodity rather than an exciting new product category. He wrote, only choice for stablecoin issuers, one, launch chains to become platforms, or two, buy build and partner-structured yield to skirt the Genius Act. And that is exactly the path that Stripe is taking with the announcement of their layer one. Fortune reports that Stripe is hiring to develop a new blockchain. Their job ad was for a

Starting point is 00:08:41 product marketing position for their new L1 called Tempo. It described the network as a, quote, high-performance payments-focused blockchain. The rest of the ad explained that tempo is currently in stealth and being developed by a team of five in partnership with Paradigm. It also said that applicants require, quote, experience marketing to a Fortune 500 audience. Sources confirmed that the blockchain would be a native layer one compatible with Ethereum's EVM architecture. Christian Catalini, the chief strategy officer of LightSpark, is a little concerned by the news. He wrote, stable coins promised to make crypto mainstream by delivering faster, cheaper, more interconnected global payments. The paradox, the same move could undercut what the technology set out

Starting point is 00:09:16 to achieve. Add the rush to branded rails and we could end up close to where we started, just with block explorers. Worse, market concentration may rise if a few players use stablecoins to reach previously unimaginable scale. His point is that the stablecoin meta is trending towards less interoperability and composability rather than more. Based on the slim reporting, it seems that Stripe is building their own walled garden of stablecoin liquidity rather than integrating with the broader crypto ecosystem. Tether appears to be pursuing the same strategy announcing their own L1 earlier this month. As Austin Campbell put it, if everyone is launching their own L1 I have to hop between, why shouldn't I just use a bank? Well, it wouldn't have been a cure-all, allowing yield

Starting point is 00:09:51 would have provided a market-based vector for competition. Stable coin issuers could have pitched their efficient operations leading to a greater yield being passed through to consumers. Instead, it seems we're stuck with network effects being the only differentiating factor. In that world, the only thing that matters is controlling the rails, so issuers building their own L1s make perfect sense, at least from their perspective. But it's not that great for crypto folks who thought Stripe would bring a ton of traffic to the established blockchains. David Rodriguez, the head of advisory at Blockworks, tweeted, Stripe, one of the most successful fintech companies in the world, choosing to not build a roll-up on Ethereum is not very ultrasound cash money of them. Over in crypto IPO watchland, Bullish has

Starting point is 00:10:27 upsized their public offering, indicating excessive demand. Last week, when the institutional exchange announced their IPO, they were targeting a $630 million raise. Now they've announced plans to offer as much as 990 million in share sales. The number of shares on offer has been increased by around 50%, and the price range has increased by 15%. The company is looking to go public at a $5 billion valuation. The bullish public offering will be one to watch to gauge if crypto IPO season is still hot. When Circle went public in June, the upsizing of their IPO was one of the first signs of exuberance. Even with the upsizing, the stock still rallied more than 4x in the first three weeks. Bullish could be a repeat of the same phenomenon, or this could be a sign that retail traders are

Starting point is 00:11:05 piling into an IPO that they can get their hands on. IPO shares are being offered on multiple retail platforms like Robin Hood and E. Toro. With Circle and E. Toro each seeing a big IPO pop, there's a sense that any crypto listing is a buy. The difference is that Circle and Eitoro each each have strong underlying businesses. They were priced a little optimistically, but that's nothing compared to the bullish valuation. Davy Wan, a primitive crypto wrote, The bullish IPO is too bullish, with 100x-ebidah and 500x price to earnings. This tells you a lot about the market. Left-hand Octopus commented, Sentiment Check, an IPO of a company called Bullish that is backed by Kathy Wood that is losing

Starting point is 00:11:39 over $300 million a year is a hot IPO. However, as we saw with the Circle IPO, the fundamentals might not matter with animal spirits and play. This is still a way oversubscribed crypto IPO. An account called trading stocks gave the retail analysis posting, the next IPO is literally called bullish. And maybe that's all that's needed for a successful IPO in this market. For now, though, that's going to do it for today's breakdown. appreciate you listening as always, and until next time, be safe and take care of each other. Peace.

The Breakdown - Democrats Gear Up for Fight Over Crypto Market Structure Bill

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