The Breakdown - Getting Crypto Regulation Right

Episode Date: June 9, 2024

A reading and discussion inspired by https://blockworks.co/news/end-sec-war-on-crypto and https://blockworks.co/news/crypto-regulators-us-global-legislation 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, June 9th, 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. Well, friends, we are sitting here as the tide turns around us, and you can absolutely feel that something is shifted in crypto. There are the politics around it that we've covered so extensively

here. There's the ETH-E-TF approvals that happened recently. But whatever the case, it feels like it is time to move on and move to the next phase, and that is the theme of the first piece that we are reading today by Skybridge Capitals Anthony Scaramucci called It's Time to End the SEC's War on Crypto. Now, my COVID-Having self is going to turn this over to the 11 Labs version of NLW to read this, And then I will be back. The American government is badly damaged. We need public servants who care more about right or wrong, especially when it comes to the crypto industry.

I'm not denying that there are reasonable questions about how crypto firms should be regulated. Many policy questions still require legislation to resolve. But our current system is broken. The Securities and Exchange Commission traditionally does not expose itself in its credibility to an appellate beatdown. But this SEC is different. This SEC and Chair Gary Gensler have an extra-regulatory anti-com.

crypto agenda, and they are using their power to obstruct and delay the industry, imposing their own preferences where they can. Gensler may not like Bitcoin, but whether you decide to invest in Bitcoin is up to you, not the SEC. What's going on with Gensler at the SEC is clearly a culture of bad faith against crypto. Take January's approval of Spot Bitcoin ETFs, which only came after years of good faith applications from crypto industry participants. The SEC was helpless to explain or defend its decision to reject past Spot Bitcoin ETFs, not a leg to stand on, it was truly an embarrassment. The court then ruled that the SEC position was arbitrary and capricious, and ultimately, Chair Gensler was forced to vote to approve a Bitcoin ETF he was hell-bent to obstruct.

Bitcoin ETFs from firms like BlackRock, Fidelity, and Franklin Templeton provide a safe and easy way for U.S. investors to buy Bitcoin. They easily satisfy the SEC's investor protection standards. They are in the best interest of the investors the SEC is sworn to protect. And three months after their launch, Bitcoin ETFs hold $61 billion in assets. Or take the recent SEC versus debt box fiasco. Two SEC lawyers leading an anti-crypto action were forced to resign after a federal judge sanctioned the agency for gross abuse of power. The SEC misled the court to get a temporary restraining order against cryptofirm debt box.

This action was ex parte without any notice to debt box. They violated the court's trust. Forced to resign? After that debacle, the SEC should have turned off the lawyer's key cards before they got back to the office. But maybe they were following marching orders. Where do we go from here? This lack of communication between regulators and crypto participants has been going on for years and

needs to change. Many other issues in crypto could be navigated in good faith if regulators simply engaged with the industry. Back in 2021, Coinbase CEO Brian Armstrong found that the SEC was the only government branch unwilling to meet with the firm. Coinbase is a public company, and it is now in litigation with the SEC relating to questions that could have been discussed and resolved in good faith back in 2021. But Good Faith left the building when Gary Gensler walked in. For example, take now the public spectacle of Gensler in front of Congress in April 2023, when he evaded the fundamental question of whether crypto's second largest asset, ETH, is a security. Documents in the Consensis lawsuit against the SEC

describe how the agency was pursuing an investigation into the nature of ETH days before Gensler testified. Frustrating. Chair Gensler refused to answer questions regarding the SEC's classification of ether, Rep Patrick McHenry, RNC, said on X, New court filings show this was an intentional attempt to misrepresent the commission's position. Ethereum established in 2015 has a market value of $457 billion. We should have a public statement from the SEC on this one. And to add to the federal regulatory charade, the Commodity Futures Trading Commission went to court this year claiming Ethereum is a commodity and not a security for the purpose of federal

regulation. Do these guys talk to each other? If the SEC thinks Ethereum is a security, why not just say it? That's an important question. If you are not steeped in crypto, you may struggle to answer. answer it. But regulatory clarity unlocks the potential of the industry, and Gensler does not want that to happen. He has an agenda unrelated to his job as a regulator, and he is backed by Senator Elizabeth Warren, founder of the anti-crypto army, the world's smallest and most unpopular political unit.

Why should we care about crypto? Here's why. Crypto is a disruptive transition of the kind this country normally leads and dominates. Capital and talent are gravitating to the industry. Crypto orchestrates the deployment of capital to overcome seemingly insurmountable barriers to entry. Look at how the U.S. Stablecoin, the digital version of the U.S. dollar with over $140 billion in circulation, is disrupting banking and payments, and incidentally fostering the globalization of the dollar to the benefit of all Americans. We need a good faith regulator to get in the room with the adults in the crypto industry. We need to move past untethered regulatory obstruction. Goodbye, Gary Gensler. Hello, honest reform.

Okay, back to real NLW here. The question is, if we are moving beyond this war that the SEC has been fighting against crypto, how might we regulate it better? Well, for that, we turn to another piece by Eli Cohen called, Hey, Regulators, here's how to get crypto right. I know it is not in their nature, Eli writes, but U.S. regulators could learn a lot by researching the digital asset frameworks that overseas regulators have already gotten right. In the United States, the understandable doom and gloom around the regulatory environment

has put a pall on much of the enthusiasm in the crypto industry. The Gensler SEC seems to be lashing out at the biggest players in the market with Wells notices sent to uniswap, consensies, and Robin Hood. But as the meme goes, touch grass. For crypto-regulatory lawyers, this means getting out of the United States. I had the good fortune a few weeks ago to be able to travel to Dubai and Bangkok for a series of crypto conferences. And the mood in those markets is very different.

The vibe in Mena and A-PAC around regulatory frameworks is really positive. The regulators there are clearly taking a different approach to crypto. Many in crypto, especially in the United States, feel that markets are either pro-crypto or anti-crypto, but regulators don't think that way. Instead, most regulators are thoughtful and careful when approaching a new industry like the digital assets markets. But what does that mean in practice? Let's take a look at a couple of jurisdictions that I think are coming closest to getting it right. Abu Dhabi Global Market Approach to Digital Asset Regulation. In Dubai, just before Token, 2014, Centrofuge co-hosted the first in a series of five real-world asset RWA summit events held across the globe. One of our speakers was Wylem-Quak from the Abu Dhabi Global Markets, ADGM Financial Services Regulatory Authority, FSRA, and Kwak made a great point. It is much easier for smaller markets to embrace innovation than bigger markets. Regulators like the Fressa or the Cayman Islands Monetary Authority, Saima, have less political pressure and less vested interest to manage. Their approaches can be adapted more quickly. They can be more flexed. flexible. Flexibility is the crucial point. Crypto markets move fast. Innovation is happening every day.

No regulator has the resources to match a global industry based on developing technology, and nowhere is that more the case than with RWAs, considering how it sits right on the edge between Tradfai and Defi. Regulatory frameworks need to have flexibility built in. This works better in principles-based regimes rather than rules-based regimes. A principles-based regime moves away from reliance on prescriptive rules, instead assessing projects on the basis of high-level principles. As with the ADGM, these principles should be broad-based and outcomes-based. This then allows the regulator to assess projects and applicants on the basis of whether their activities are designed to achieve certain results, rather than whether it fits into a

box of existing rules or not. Back to Abu Dhabi. The ADGM-Fresa takes a risk-based approach based on regulatory clarity. Its advantages in terms of sophistication and resources are readily apparent, and the support and backing of a business-friendly ecosystem is very important. Too often, crypto projects and crypto lawyers look solely at the laws and rules and do not focus sufficiently on the service providers and their rules and risk appetites. Without a supportive ecosystem, projects can fail, even if all the regulatory boxes have

been checked. Thailand's regulatory framework for digital assets. Similar to the ADGM for ESSA, the Thai Securities and Exchange Commission has taken important steps to create a comprehensive digital assets regulatory framework that balances investor protection with the promotion of innovation. Thailand was one of the earliest jurisdictions to opt for a bespoke framework treating digital assets as a new asset class. The regulators that tried or are trying to shoehorn digital assets into existing regulatory frameworks have found it difficult. Crypto markets are too innovative to fit into historical Tradfai rules. Thailand

recognized this very early with the emergency decree on digital asset businesses coming into force in May 2018. Just as importantly, the Thai SEC continues to develop new rules with an important set of amendments becoming effective from January 16, 2024. It shouldn't need to be said, but it is significant to note that these regimes are not designed to simply greenlight digital asset projects. These are rigorous frameworks applied consistently and effectively by well-resourced, experienced staff. It is not sufficient to simply put the framework in place. The teams need to be trained to efficiently enforce the rules.

Key elements of effective crypto-regulation In some, in my view, the key elements of effective crypto regulation are a comprehensive, tailor-made, principles-based digital asset regulatory framework, a commitment to continually develop, adapt and modify the regime as innovation and technology progresses, a sophisticated, friendly, energetic, and resource staff that has delegated sufficient flexibility to address license applications with a risk-based approach, a clear and uniformly applied enforcement mechanism to prevent fraud and unauthorized regulated activity. I know it is not in their nature, but U.S. legislators and regulators could learn a lot by researching the digital asset regulatory regimes

in MENA, APEC, and elsewhere that have gotten it right. Maybe then the ongoing discussions on legislative changes in the U.S. could proceed from a solid basis toward a satisfactory conclusion. All right, back to NLW again. Ultimately, what I think matters about the piece that we just listened to is not so much the details. Obviously, there are going to be lots of different people who have differences of opinions and agree or choose to disagree around the exact ways to correctly regulate crypto, point is, it is very, very nice to be potentially moving to an era where we're not having to justify our own existence and instead get to talk about the right way to regulate the space with a receptive Congress Senate and yes, maybe even White House. Here's hoping that this trend continues,

but for now I am going to wrap it there and go crawl into a hole. Appreciate you guys listening or always. Until next time, be safe and take care of each other. Peace.