The Breakdown - Governments vs. Networks: The Battle for the Soul of Finance

Episode Date: September 17, 2020

Today on the Brief: Kraken is the first crypto exchange to become a U.S. bank FTC preparing antitrust lawsuit against Facebook Gold-standard fan Judy Shelton doesn’t have the votes to be confirmed as Federal Reserve governor  Our main discussion: The battle for the soul of finance.  In this episode, NLW looks at the power competition between governments on the one hand and the decentralized network-driven finance alternatives that would reshape that power. Interestingly, in this competition corporations may play a role that benefits both sides at different times and in different ways.

I think most of all that what we're seeing right now is something that will play out a lot in the years to come, which is nimble innovations that come often from an anonymous or pseudo-anonymous creator or set of creators that have a questionable geographic origin and that are willing to be mobile geographically to sort of arbitrage different regulatory regimes. It's not clear exactly how this plays out. It's not clear exactly how draconian governments will get to retain control of some of these fundamental parts of the economy and society, but it's going to be something that we'll get to see from the front row. 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 Crypto.com, BitStamp, and nexo.io, and produced and distributed by CoinDess. What's going on, guys? it is Wednesday, September 16th, and today we are talking about the battle for the soul of finance, a battle that pits governments against corporations, against networks, and is likely to produce some very interesting and perhaps unexpected alliances. First up, however, let's do the brief.

First up on the brief today, Cracken is now a bank. Cracken has become the first crypto exchange to become a U.S. bank. The Wyoming Banking board approved Cracken's application to become an SPDI, a special purpose depository institution. A spokesperson for Cracken said, by becoming a bank, we get direct access to federal payments infrastructure, and we can more seamlessly integrate banking and funding options for customers. Specifically, this new designation gives Cracken a, quote, regulatory passport into other states, rather than having to deal with state-by-state compliance. What's more, it allows them to offer a variety of new services such as qualified custody for

institutions, digital asset debit cards, and savings accounts. Now, one of the interesting things about SPDIs, which you may have heard about from Caitlin Long, who is instrumental in helping develop this new infrastructure, is that they're not allowed to lend. They have to hold 100% of their assets in reserve. And this is part of why this is such an important move. On the one hand, it's great to see crypto institutions getting access to this larger infrastructure to be able to compete to offer these types of banking services to customers,

but it's also an affirmation of this very different approach to a depository institution that is very dissimilar from the way banks are organized today. Next up on the brief today, the antitrust winds are blowing. The Wall Street Journal is reporting that the FTC is gearing up for a possible anti-trust. trust suit against Facebook by the end of the year. The final decision hasn't been made, and Facebook is still presenting its case. However, one potential area of the probe is acquisitions of potential competitors, think Instagram and WhatsApp, and another area is how Facebook manages its platform with regard to application developers. Should there be action against Facebook, the potential

remediation could include restrictions on how Facebook operates or even breaking off pieces of the business. The FTC is also planning to file against Google, and basically what these two things taken together mean is that while antitrust has been relatively non-existent for the past decade or more, the mood in the public is anti-tech enough that you have to think these actions will be politically popular. The issue is that we live in a network effects world, and that means that that we really have to redefine everything from antitrust itself to what we consider a quote-unquote natural monopoly to even question as simple as what is a public utility. Are these communication networks in fact public utilities and what does that mean in terms of how they should

be regulated, how they should be treated in terms of antitrust? I don't think it's as simple as just applying the rules from before because these represent fundamentally new phenomena in business and in terms of their impact on our social lives. Meanwhile, I still can't believe that there's so much attention on Google and Facebook, while Amazon continues to go totally unnoticed, even as it just eats and eats and eats like some giant Galactic Eldrazi or something. Every small business, every competitive internet business, every competitive brand. Like many, I love the convenience that Amazon brings, but we are headed to an Amazon-only world, and if we're going to have this conversation about antitrust, we have to have the conversation about how Amazon uses its data,

data that it gets from third-party sellers, to then go back and compete with those third-party sellers, especially when those third-party sellers represent every single commerce category that there is. Finally, on the brief today, Judy Shelton doesn't have the votes. President Trump nominated a very controversial Fed governor nominee in Judy Shelton. Previously, she had made statements about not needing a Fed at all and even returning to a gold standard, which some of you Bitcoiners might say, hey, that sounds not so bad. The thing is, once she started getting closer to the Trump campaign and then the Trump administration, she started losing some of those points of views and echoing his call for lower interest rates,

which has called into question her impartiality. Indeed, for many people, the biggest issue with the Shelton nominee isn't the question of things like a gold standard, but a worry about the independence of the Fed from the Treasury. According to a new Bloomberg piece, Shelton just doesn't have the votes even among Republicans to make it through. However, I still believe that this question of the independence of the Fed from the Treasury is going to be one of the most important regulatory issues we face and one of the most important discussions we have over the next five to ten years. And that provides a nice little entree to our main topic, which is the battle for the soul of finance, governments, corporations, and networks.

What I want to do in this conversation is connect a few of the news stories that I've read in the past few days in this larger question of where finance is headed and who has a stake in that future. Let's look first at governments. Government policy obviously has a huge impact on the shape of the economy. In fact, yesterday's show on zombie companies was all about how these decisions to keep interest rates artificially low create their own types of economic spirals. In our current economic framework, we've seen huge intervention from central banks for over a decade now. For many, one of the central problems with this is, that it increases asset prices while not doing that much to actually benefit the people who don't hold assets. Yesterday in a presser with reporters, President Trump was asked about how those at the top are doing better in the economy and bit back with the statement, quote, stocks are owned by everybody. The reality, of course, is that this just isn't really true, at least certainly not in the way that he meant it. Federal Reserve statistics show that only 12% of most low-income,

Americans own stocks. Among the bottom 40% of income earners, only 32.5% own stocks. These numbers are also even more profound when you look at total ownership. The bottom 50% of Americans own less than 1% of the total market cap. What's going on, guys? I'm excited to share that one of this month's breakdown sponsors is crypto.com. Crypto.com offers one of the most cost-efficient ways to purchase crypto out there, as they've just waived the 3.5% credit card fee for all crypto purchases. What's more? With crypto.com's MCO Visa card, you can get up to 10% back on things like food and grocery shopping. When you buy gift cards with the crypto.com app, you can get up to 20% back. Download the crypto.com app today and enjoy these offers until the end of September.

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and you can add or withdraw funds at any time. Get started at nexo.io. Inequality is, of course, not just a byproduct of government. But certainly government policy has an impact on who gets to participate in the system of finance and how. So if that's governments, you have on the other side a new generation of networks, which are in some way, shape, and form trying to liberate finance. Let's look at defy decentralized finance first because it has it right there in the name. In many ways, right now, defy is a lot of building a better mouse trap. It's a lot of yield generation sandboxes.

I think you can make an argument that those yield generation sandboxes make a lot more sense in the context of a zero interest rate world, but let's hold that aside even for a minute. There is an underlying idea here that money should be as easy to move and do things with as information. And even if the mechanism by which defy builders are doing that is by building better casinos, as Naval Ravacant put it on Twitter the other day, the rails that they innovate can be deployed for many different purposes. I think it's very important right now to separate the concept of quote, decentralized finance from whatever the hot new farming protocol yield generation game is at the

moment. There is another network, obviously, though, in this space, which is Bitcoin. And part of the biggest fundamental appeal right now of Bitcoin is that it opts you out of the existing system of overly cheap money, which could in the long run lead to, and in fact in many people's estimation, will inevitably lead to a devalued currency. This view of Bitcoin is, of course, at the very center of micro-strategy's decision to get out of cash. The company has moved $425 million worth of their cash assets into Bitcoin in the last couple months alone. So when you have a government monopoly on kind of money and finance historically, and then new networks who are trying to liberate and do new things with it, you're inevitably going to get

a crash and a conflict. We are awash today in stories of how that conflict is playing out. Let's go over to India, where Bloomberg is reporting that the Indian government is discussing a bill that would ban crypto trading. The country is theoretically for using blockchain for things like land records, but against the actual crypto asset trading game. The Reserve Bank of India has of course previously banned banks from working with crypto traders and exchanges, which from 2018 to early this year put a real damper on the Indian crypto industry. That decision was overruled by the Indian Supreme Court in

March, and since then there has been a flourishing of Indian crypto activity. The Securities and Exchange Commission of Nigeria, which is Africa's most populous country, said on Friday that all crypto assets will fall under securities guidelines, and further, that the burden will be on issuers to show how they don't count as a security if they believe that they don't. In Europe, a draft of the Mika or markets in crypto assets draft legislation was leaked. According to those who have seen the leaks, it intends to treat crypto the same as any other regulated financial instrument, which, on the one hand, provides some much-needed regulatory clarity. On the other hand, it could be a real problem for these new decentralized protocols. Issuers and service providers need to be incorporated and

have registered offices in a member state, which suggests that the draft may favor banks and traditional investment firms' participation in this industry rather than some of these really radical, differently structured types of organizations. In Latin America, Paxville announced that it was leaving Venezuela, saying, concerns regarding the regulatory landscape around Venezuela and Paxville's own risk tolerance prompted this move. Taxful is the second largest peer-to-peer exchange in Venezuela after local bitcoins, and it seems like both Venezuelan rules as well as U.S. sanctions on the country are causing this tough decision. And then there's finally the U.S. where there was an interesting ICO settlement. The SEC levied a $6.1 million fine on Unicorn for their 2017 ICO,

and this penalty is about the size of the company's current assets. The dissenting opinion came from Hester Pierce, who said it will have a, quote, chilling effect on innovation. She wrote, We should strive to avoid enforcement actions and sanctions that enervate innovation and stifle the economic growth that innovation brings. I believe that this action and its accompanying sanctions will have such consequences. Pearson said, suggested that a better approach would be a regulatory safe harbor,

to allow people to experiment without fear of retribution. She said, imagine if such a regulatory safe harbor had been available to Unicorn. Instead of permanently disabling its tokens as a result of today's settlement enforcement action, unicorn in concert with its token holders might be devoting its time and resources to identifying new uses for the token and expanding its user base. By failing to challenge ourselves to experiment with new approaches to regulation, we and those whose interests we are pledged to serve risk surrendering the fruits of innovation.

So if you have this inevitable showdown between governments on the one hand and these decentralized distributed networks on the other, where do corporations come into play? The interesting thing is that to some extent they're playing all sides. They're playing the government sides certainly, right? MasterCard announced a new tool and testing environment for central bank digital currencies. It is clearly positioning itself to play in that space. Corporations are also increasingly involved in the Bitcoin. space, though, in the crypto space. They are creating a business interest that is going to get it much harder for governments to just outright ban the entire space. There was also a moment last

year best embodied by Libra and maybe JPM coin, where it seemed like corporations were going to be much more aggressive about trying to create their own money. They've backed off that a little, I think after seeing the aggressive response to Facebook's Libra, but it still represents another path that corporations to play. To sum this up, I think corporations are in this interesting middle space where they could go lots of different ways. I think that some can be recruited to have aligned interests with the folks who are trying to build new types of distributed networks, right? Corporations can help give them some amount of legitimacy and also just strong interest to lobby on their behalf. At the same time, however, those corporations are also likely to benefit from regulation.

because the regulations that governments put on them are probably going to be written in the context of those old types of organizational structures, and what's more, corporations have the capacity to bear compliance costs. I think most of all that what we're seeing right now is something that will play out a lot in the years to come, which is nimble innovations that come often from an anonymous or pseudo-anonymous creator or set of creators that have a questionable geographic origin and that are willing to be mobile geographically to sort of arbitrage different regulatory regimes. It's not clear exactly how this plays out. It's not clear exactly how draconian governments will get to retain control of some of these

fundamental parts of the economy and society. But it's going to be something that we'll get to see from the front row. Anyways, guys, I hope you enjoyed this show, and I appreciate you listening. And until tomorrow, be safe and take it. Take care of each other. Peace.