The Breakdown - E. Warren's CFPB Tries Some Midnight Crypto Rulemaking

Episode Date: January 14, 2025

It wouldn't be an outgoing administration without some last minute political intrigue. This time it's the Consumer Financial Protection Bureau (an agency firmly in the crosshairs of Elon Musk's DOGE) attempting to impose rules on crypto payments. Sponsored by: Ledn Need liquidity without selling your Bitcoin? For 6+ years, Ledn has been the trusted choice for Bitcoin-backed lending. With transparency, security, and trust at our core, we help you access your BTC’s wealth while HODLing. Discover what your Bitcoin can do at ledn.io/borrowing. 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 Monday, January 13th. And today we are talking about a last gasp stablecoin rule from the outgoing presidential administration. 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, rough Monday in the markets, we are definitely dealing with some macro intrigue.

Traders seem to be very opposed to the Fed, setting up a battle of fairly epic proportions. I'm sure we'll talk about that more later this week. For now, we are turning to one of the things that I think many of us had been looking out for, which is to see whether there would be any sort of last-minute shenanigans from the outgoing Biden administration vis-a-vis attempts to impose crypto-related rules on their way out. While the Consumer Finance Protection Bureau has now rushed out a midnight rule proposal that could stymie stablecoin adoption. On Friday, the CFPB introduced a rule requiring accounts and wallets using stablecoins

to be protected against fraud and hacks in a similar way to bank accounts. Rather than taking a bespoke approach to consumer protection issues in the crypto space, the rule simply extends 40-year-old legislation on electronic payments to apply to crypto. CFPB director Rohit Chopra said in a statement, when people pay for their family expenses using new forms of digital payment, they must be confident that their transactions are not tainted by harmful surveillance or errors. The rule is extremely broad and lacks certainty. As written, it seems like it might include self-custody wallet providers

and potentially pull in crypto-native assets to the extent that they are used as a means of payment. While this kind of general-purpose protection is an accepted part of Tradfai payment rails, the unique properties of crypto make it difficult to implement. It's entirely unclear how small self-hosted wallet providers would be able to afford to provide fraud protection in the same way credit card companies do. In a response article, Coin Center Executive Director, Peter Van Valkenberg, highlights that the rule is unclear

on whether it covers self-hosted wallets. If it does, he argued it would be unconstitutional and go far beyond the CFPB's statutory authority. He wrote, If we go to a world where all wallet providers must be regulated, I no longer have any legal option to access blockchain networks other than through an approved and regulated institution

who will permission and surveil. That's a fundamental change to my liberty, more akin to outlawing cash, than to simply regulating for consumer protection purposes. There were also dozens of takes explaining that this approach simply wouldn't be practical. NYU professor Drew Hinkies was concerned bad faith rulemaking could delay well-thought-out regulations. He wrote, here's a contrary intake. Applying consumer protections to some crypto transactions is a good idea, but this is the wrong tool. Crypto needs consumer protection,

but these laws don't fit or make sense. In the aftermath of the 3AC and FTX wave of insolvencies, there's a clear need and opportunity for reasonable consumer protection to mitigate risks of consumer harm to those who chose to rely on intermediaries. Even those calling for federal agencies to back off their adversarial positions against crypto, acknowledge that fraud should be prosecuted and that consumer protection should be prioritized. So a rule of regulation that protects consumers from intermediaries when using digital assets should not be caused for outrage or panic. Hinkies then provides some examples of how defining the rule more tightly could work, but mostly wanted to see more engagement with the industry rather than regulation by decree. Ultimately, this rule is unlikely to go

into effect. The CFPB is on the top of the shortlist for Elon Musk's Doge effort as an agency that doesn't need to exist. It was established in 2010 after Elizabeth Warren's push for a dedicated consumer protection regulator in the wake of the financial crisis. That connection and the mission creeped to the agency was not lost on some commenters. BBO Robbie posted, soon Elizabeth Warren is going to be regulating my pants pocket as a financial institution because it's holding a dollar bill on my behalf. Staying on the Washington theme for a moment, FDIC vice chair Travis Hill has slammed the agency's involvement in Operation Chokepoint 2.0 and called for a more open-minded approach to technology during the next administration. During a speech on Friday, the Republican

bureaucrats said the FDIC's damaging approach had, quote, stifled innovation and contributed to a public perception that the FDIC is closed for business if institutions are interested in anything related to blockchain or distributed ledger technology. The Commons come after the revelation of freedom of information documents released last week. They showed the FDIC had gone far beyond limiting crypto customers but actively shut down dozens of blockchain products being developed. by banks. Hill said, while adopting a new approach to digital assets and putting an end to any and all chokepoint-like tactics are essential first steps, regulators also need to re-evaluate our approach to implementing the Bank Secrecy Act. While we all share the goal of ensuring criminals and terrorists are

not using the banking system to fund drug trafficking, terrorism, and other serious crimes, the current BSA regime creates an incentive for banks to close accounts rather than risk-massive fines for inadequate BSA compliance. Meanwhile, the FDIC whistleblower account continues to drop absolute bombs. A 21-point thread outlined a huge number of new allegations contained in recording secretly made by staff. This included a claim that the FDIC attempted to cover up domestic violence by Chairman Marty Groomberg. Less scandalous, but more humorous, was a recording where, quote, FDIC's senior managers laughed at crypto supporters attempt to hold them accountable online, suggesting they'd never be organized enough to hold the FDIC accountable, especially with the

FDIC's disinformation campaign. The FDIC specifically discussed how they'd win, as they have a dedicated media relations team that pays more than most individuals make. One employee bragged that his annual salary is probably more than Nick Carter makes in a decade. Nick Carter, clearly enjoying the unraveling, posted, the FDIC called me poor. It's over for me, bros. We don't have copies of the recording, so can't verify the claims. However, Carter said he would be playing them on his podcast if he ever gets a hold of them. If you've been around Bitcoin for long enough, you've heard the term Hoddle and the name Lennon. Lennon has been the go-to leader in Bitcoin lending for over six years. They help clients unlock the liquidity of their Bitcoin, allowing them to huddle while still

accessing the wealth of their BTC. They've been battle-tested with their focus on transparency, security and trust, allowing them to build a proven track record of client's success and security. Leden has helped tens of thousands of clients harness the value of their digital assets, issuing more than 6.5 billion in loans over the years. But as the crypto industry says, don't trust verify. Check out Lennon's trust pilot or their reviews on social media. And to learn more about what your Bitcoin can do for you, check out leaden.io slash borrowing. That's LEDN.com. Please visit leaden.io slash legal for product terms and disclosures. Product availability varies by jurisdiction. Senator Cynthia Lummis has been tentatively selected to lead the first ever

Senate Digital Assets Subcommittee. The panel will be formed under the Senate Banking Committee and was a core promise from newly appointed committee chair Tim Scott. A Senate aide said that long-time crypto advocate Bill Hagerty and freshman Senator Bernie Moreno will just join the subcommittee on the Republican side. Lammis had some very clear priorities for the committee, tweeting, recent allegations of attacks against digital asset companies by staff at the FDIC, if true, are bone-chilling. Operation chokepoint 2.0 is real, and I will work with Senate Banking Tim Scott to get to the bottom of these serious allegations. Custodia Bank CEO, Caitlin Long, thinks it still hasn't sunk in how big the changes could be this year, commenting,

I don't think folks yet realize just how much the Overton window has shifted for major reform of U.S. federal bank regulators, to repair their broken governance, fix, overlap in redundancy of roles and reverse the politicization of banking. She called the comment from Lammis a very important signpost. Jake Trevinsky, the chief legal officer of Varian Fund, though, is starting to get concerned that vengeance rather than progress will be the focus of the new administration, writing, we must bring to light the full extent of Operation Choke Point 2.0, but we must not get distracted fighting the last war. We have more important things to do than punishing old enemies. We must end debanking once and for all, and enact durable policy so it never

happens again. Meanwhile, in the House, a little-known Wisconsin lawmaker will take over as chair of that chamber's digital asset subcommittee. Representative Brian Steele will take over the reins from former chair, French Hill, who will be leading the full Financial Services Committee. Although he has little name recognition, Steele has been pushing for crypto regulations since 2021. During a September hearing, he said it was imperative to create functional regulation in the U.S. to ensure the industry was not pushed offshore. He holds the view that a lack of clarity under Gary Gensler contributed to investor harm and that the U.S. needs to be a leader in Web3. Steele voted for the passage of Fit 21 and the repeal of SAB-121, earning him an A-grade from advocacy

group stand with crypto. The congressman is well known to crypto lobbyists in Washington suggesting he has been doing the hard work behind the scenes. G. Kim, the president of the Crypto Council for Innovation, wrote, we look forward to continuing to work with you and your amazing staff. Other notable appointments to House Financial Services Committee leadership include Bill Bill Huzenga as vice chair, and Warren Davidson as chair of the subcommittee on national security, illicit finance, and international financial institutions.

Zach Guzman of Coinage Media commented on the stacked lineup, tweeting, Holy hell, that's like a who's who of who went the hardest on Gary Gensler at all those hearings. Amazing to see so much pro-crypto representation. Finally, on this side, the exodus of anti-crypto regulators continues ahead of Trump's inauguration as the CFTC enforcement chief resigns. Ian McGinley will step away, leaving the field clear for the new administration to install their own successor. McGinley had a brief but intense tenure at the agency.

joining in February 2023, he spearheaded lawsuits against Binance, Kucoin, and Falcon Labs. Meanwhile, the choice of the new CFTC chair seems to be narrowing in on Summer Mercinger, according to new reporting from Unchained. Last month, there were rumors that A16C policy head and former CFTC Commissioner Brian Quintends was being considered for the role. As Mercinger as a current commissioner, she could be appointed as acting chair without the need for a Senate confirmation, streamlining the changeover. Mercinger has been extremely thoughtful about pro-crypto policy during her time at the agency.

She has advocated for clear regulations and expressed concern about setting policy through enforcement rather than rulemaking. She issued a strong dissent against an enforcement action brought against Uniswap late last year, writing, using our enforcement authorities against DFI protocols instead of providing clarity through rulemaking, risks driving responsible DFI developers overseas, leaving behind the bad actors. As we round the corner now, though, let's turn our attention back to market actors, where the annual Bitwise survey of investment advisors show that Bitcoin adoption has gone parabolic in traditional financial services. 22% of investment advisors have made a Bitcoin allocation in their client's portfolios, doubling since

2003, and a staggering 96% of advisors have fielded questions about crypto over the past year. Still, it appears that just 35% of advisors are able to purchase crypto in client accounts. Bitwise has conducted this survey every year since 2018, so has some of the best data about changing attitudes towards Bitcoin among investment advisors. This is by far the strongest sentiment they've recorded over the past five years. Bitwise chief investment officer Matt Hogan said, if you had any doubt that 2024 was a massive inflection point for crypto. Advisors are awakening to crypto's potential like never before, and they're allocating like never

before. But perhaps most staggering is how much room we still have to run, with two-thirds of all financial advisors, who advise millions of Americans and managed trillions in assets, still unable to access crypto for clients. We see that changing in 2025 as the mainstream era of crypto continues apace. The survey gathered responses from over 400 financial professionals, ranging from small independent advisors to the largest wirehouse representatives. It was conducted in late November and early December, so capture the vibe shift following the election. The survey found that 56% of advisors were more likely to invest in crypto this year as a direct result of the Trump victory. Bitwise CEO Hunter Horsley wrote,

56% have changed their view on crypto. This is intuitive to most, but remarkable to see quantified. Further, there is a perception that regulatory clarity has improved, even though there haven't been many material changes beyond the launch of the ETFs. 50% of advisors said that regulatory uncertainty was their major blocker, down from 60 to 65% in previous. years. 71% said they wanted to allocate using ETFs, with a further 17% saying they preferred direct ownership of tokens. Bitwise also found that crypto allocations are incredibly sticky. 99% of advisors who already allocate their clients to crypto are planning to maintain or increase their exposure this year. Advisors who haven't touched crypto yet are also much more likely than ever

to change that stance this year. 19% of them are probably or definitely going to buy clients their first exposure in 2025, up from 8% in the previous year's survey. David Seimer, the CEO of Wave Digital Assets, has seen this adoption up close over the years. His firm provides asset management to funds and high net worth individuals in the crypto industry. Despite the recent drawdown, his clients remain extremely bullish on Bitcoin. Simer commented, In 14 years of owning Bitcoin, I've never seen a dichotomy like this. The traders are all worried and nervous and hedged, fully neutral or worse.

In the long term, people are all super bullish. Talking price targets, he added, there's a really good chance we'll go to $200,000 this year. Do I think we'll see $1 million per coin in my lifetime? Sure, not soon, not in the next year. But the smart, more connected people that I know are also really bullish. More is going to happen in the next six months than most people realize. Summer is looking towards global Bitcoin adoption, but not necessarily in the form of Bitcoin strategic reserves. Even just the normalization of the asset class could have huge ramifications

across multiple jurisdictions. He said, Japan and Singapore, those are societies where they actually trust and rely on their governments. If their government says it's okay, it's actually really okay. It's different from the U.S. where we think our guys are idiots. Seimer also noted that the U.S. Bitcoin ETFs have changed the game for asset managers worldwide, commenting, the ETFs launched in America and they absolutely devastated all the Bitcoin ETPs around the world. All of them had these terrible products charging 1.5%. All of those guys got crushed.

He believes these asset managers will need to introduce exotic products like yield generation and multi-token funds to make up for the lost liquidity. Ultimately, you're seeing a lot of the two big themes heading into 2025 in today's stories. on the one hand, regulatory cleanup and a repositioning for a new administration, and on the other, the continued excitement and entrance of traditional actors into the system. Now, like I said at the beginning, this is all happening under the cloud of some macro instability, so we'll have to see how all these forces play out, but at least on the home front, things are looking good heading into this year. For now that, that is going to do it for today's breakdown.

Appreciate you listening, as always. Until next time, be safe and take care of each other. Peace.