The Breakdown - Is Political Gridlock Good for Crypto?

Episode Date: January 8, 2023

On the first Weekly Recap of 2023, NLW hones in on the political impasse in Washington D.C. and explores whether a divided Congress (and a divided Republican party within Congress) might be good for crypto in a year that politicians are feeling animosity towards the industry.  Enjoying this content?   SUBSCRIBE to the Podcast Apple:  https://podcasts.apple.com/podcast/id1438693620?at=1000lSDb Spotify: https://open.spotify.com/show/538vuul1PuorUDwgkC8JWF?si=ddSvD-HST2e_E7wgxcjtfQ Google: https://podcasts.google.com/feed/aHR0cHM6Ly9ubHdjcnlwdG8ubGlic3luLmNvbS9yc3M=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with today’s editing by Michele Musso and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Image credit: mathisworks/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8. 

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 produced and distributed by CoinDest. What's going on, guys? It is Saturday, January 7th, and that means it's time for the first weekly recap of 2023. Now, before we dive into that one quick note, there are two ways to listen to the breakdown. You can hear us on the CoinDesk Podcast Network, which comes out every after. for noon and features other great Coin desk shows alongside the breakdown, or you can listen on the breakdown only feed which comes out a few hours later in the evening. Wherever you listen,

if you are enjoying the show, I would so appreciate it if you would take the time to leave a rating or a review. It makes a huge difference, and I truly appreciate it. Now, to today's show, we are doing a true weekly recap. We are looking at where crypto stands after the first week of 23. The hits have come hard and fast and given us sort of exactly what we expected for this first week. So on this first weekly recap, we're going to go through category by category in no particular order to discuss where the chips stand as of today. Let's kick off with regulation, or the lack thereof. One of the big bits of news in the political world this week has been the absolute dogfight for the Republican Speaker vote in the House. If you're not in the United States, the TLDR is that Republicans took back the House, aka Congress, in last fall's midterm elections.

As one of their first orders of duty, they need to elect a Speaker to lead them, and this has not gone so well. We are now four days and 12 ballots into the process. Throughout that, Republican Kevin McCarthy has failed to gain the majority required to be seated as House Speaker, holding up the swearing in of hundreds of new members and delaying any legislative work. Despite holding a majority in the House, Republicans have been stymied by a group of hard-right members of the Ultra-Conservative Freedom Caucus, who defected from their party to endorse several alternative candidates. Now, obviously, the ins and outs and rights and wrongs of this are way, way beyond the scope of this show. But the key thing for us to know is that only 15 times since the inaugural Congress

in 1789, did a House Speaker require more than one round of voting to be elected. The last time this occurred was exactly 100 years ago in 1923, when nine rounds of voting were required to elect a speaker. Again, without a speaker, nothing in the House can move forward, including committee appointments, hearings or the adopting of new rules for how the Chamber will operate. Because of that, this does impact crypto. In December, the House Financial Services Committee convened a hearing to investigate the collapse of FTX. That committee is also responsible for economic stability issues and financial system oversight, as well as being the main body which proposes and refines draft bills related to its policy area. Without a House Speaker, no appointments to the

committee can be ratified and important legislation around financial services, including crypto policy, cannot progress. Before Congress concluded last year, there were a number of crypto bills which were being considered with great urgency. A law regulating stable coins had reached an impasse, but the matter was considered to have serious importance and time pressure. More broad regulatory bills like the Lummis Gillibrand-sponsored Responsible Financial Innovation Act, and the Stab now Boosman-sponsored Digital Commodities Consumer Protection Act, had been proposed in the Senate but would also need to pass in the House as well. So what does this all portend for legislation to come?

I don't think it's unreasonable to think that if Republicans who hold the balance of power in the House can't even come together on an agreement on appointing a speaker, there is a serious possibility of pretty substantial gridlock in Congress in general. For the crypto industry, there may be an element that no news is good news here. Without a functional legislative body to enact new regulation, the industry could continue to grow without additional government oversight and restriction. There is some bleak and bleary optimism in this. In my end-of-year interview with the blockchain associations Kristen Smith,

she said explicitly that this could be good for crypto, given that the propensity for overreaching or even vindictive policymaking right now might be higher post-FTX than at any other time. By the way, to be clear, vindictive is my word, not hers. At the same time, most people in the crypto space do think that some amount of common sense regulation is both needed and inevitable. It certainly won't help us get out of the bare market to have a lack of clarity around how major normal participants in the traditional financial system can participate in the crypto ecosystem as well. And there is one other reason to not be that thrilled about the state of regulatory affairs either, which is that in the absence of elected officials making the rules, The current default is unelected officials, i.e. the agencies like the SEC and CFTC, making the rules in less than ideal ways.

Both the SEC and the SEC have become much more active in recent years, and without any real prospect of clear regulations being passed, allowing the crypto industry to grow more legitimate, regulators could see the lack of additional guidance from Congress as the green light to keep cracking down using ill-suited regulation designed for traditional financial markets, i.e. more regulation by enforcement. Other members of the Blockchain Association gave a lot of thoughts on this as well. Jake Trevinsky, the head of policy at that organization, said there will be a lot of noise in U.S. crypto policy this year, no doubt. The question is how much converts to action. War enforcement is likely, but new laws and regulations face strong headwinds. My best guest for 2023, loud but little structural change.

A great time to build. Ron Hammond, who is the Director of Government Relations at the Blockchain Association, also took a crack at laying out how he sees the regulatory landscape. He wrote, The first day of the 118th Congress has arrived. It is no secret the crypto industry is in the crosshairs of Congress after the FTX follow. This Congress presents challenges and opportunities, though, so here is the latest from the ground. One word to summarize how things are right now for the crypto industry on the hill, bad. SBF and FTX have significantly set back the industry

in D.C. Recall, SPF was on the hill lobbying Congress and the regulators more than any other CEO in crypto and likely financial services. When his fraud became apparent in November, he was November, members on both sides of the aisle and regulators quickly distanced themselves from him. The political donations from SVF led to an onslaught of negative press, and members have largely returned or donated those contributions. Meetings with policymakers and staff have also gotten tense after the FTX fiasco. As crypto crawled across the finish line in 2022, some of the cryptosceptics turned to an odd line of thinking that there shouldn't be regulation because it will further legitimize crypto. The problem for many in D.C. is that they equate FTX

with the entire crypto industry. This isn't solely the fault of FTC. though. Celsius, Terra, and three arrows also led to this thinking. FDX, though, seems to be the straw that broke the camel's back, as many are calling for action. Dodd-Frank, Glass-Steagall, Sarbanes-Oxley. These were all major bills passed after a financial crisis or serious scandal. It is entirely possible FTC's downfall spurs this once-in-a-decade legislation. We already have proposals like Llamas Gillibrand and McHenry Waters. These historic regulatory bills, though, take a lot of political capital to move, and nothing increases the chance of passage like a crisis. If this effort were to come together, and that's a big if, then likely would be a combo of new and old bills to tackle a variety of topics.

Most of the first months of Congress will focus on FTX, though. While Stablecoin seemed like something that would be tackled first, it seems the FTCHAFinding will skip the line and become the center of attention. Stablecoin regulation is still top of mind for many, though. There is also a unique dynamic with a split Congress. Typically, a split Congress rarely passes many bills as both sides fail to see eye to eye on bills or their priorities aren't shared with the other side. A crisis can change that but not guaranteed. This split is best seen between Patrick McHenry, the Chair of House Financial Services, and Senator Sherrod Brown, Chair of Senate Banking.

Both have nearly polar opposite views on crypto, and it is hard to see a situation they can agree. It is possible, but it will be tough. On the other hand, the Agricultural Committees tend to have a better relationship, with Congressman Glenn Thompson, House Ag, and Senator Debbie Stabe now Senate Ag as chairs. Both have put out proposals on regulating crypto via the CFTC and Spotmark regulation. While different, both could agree. What else can get done? Oversight of regulators for certain. Chair McHenry said he plans to have SEC Chair Gensler in several times for oversight hearings this Congress. An opportunity the House didn't get last year. The CFTC will have similar hearings in the Ag

committees. Smaller bills like stable coins and spot market regulation have a chance of moving this year, but will likely need to wait till the dust settles on FTX, both in the courts and the congressional hearings. Similar to the Robin Hood hearings, more legislation will be proposed after. It is likely Congress will tackle new topics this year, such as NFTs, Dow's, and Defy. Some of these topics have been included in previous bills, but the interest in those topics has picked up in recent months largely due to the recent enforcement actions. To end, it can't be stated enough how much damage SPF did to the industry's reputation in D.C. Trust has eroded. The contagion is still playing out. The skeptics are growing. The

crypto-savior complex continues to fail in D.C. The good thing is crypto has a strong bench in D.C. and continues to poach talent from other industries on the advocacy, lobbying, and policy front. The industry has done a great job, realizing this is a crucial time in Congress and is putting in resources even amid crypto winter. All right, back to NLW. Thanks to Ron Hammond for that sum up. A little rough, but probably to be expected. So that's the story on regulations, but let's talk about a couple other areas of the

crypto industry. Next up is dog coins. Wait, what? Yep. One of the most active trades in the crypto market this week was a new Shiba-inu-themed coin. This one was called Bonk. It was issued on Christmas Day, airdrop to Solana NFT holders, and creators, and the price ran up by over 2,000% in the last week with a 240% gain alone on Wednesday. It was then cut in half on Thursday, but so goes the meme coin.

Solana moved up by 20% on the back of high volumes on Dexes. Bonk trading pairs saw 20 million in trading volume on Wednesday with liquidity pools paying out more than 1% per hour at their peak or more than 24% per day. On Friday, developers of Bonk burned their allocated token. around 5% of supply, stating that the move was intended to cultivate more legitimacy in the token. Now, to be clear, this thing was literally created to interact with please bong.mk.mee, where a meme Shiba Inu would hit a photo of SPF with a baseball bat. Given that, it might be fair to ask, what the hell was this thing? Is it a total repeat of bull run madness where we just buy utterly stupid crap hoping for a fast buck? Is it, on the other hand, a defiant

suggestion that crypto can still be about fun, lighthearted experiences? Or is it a it even Sam trying to make some extra scratch, maybe for his legal defense fund? These were all takes from the community. Ben Armstrong, aka BitBoy, said, quote, if you don't think it's possible SBF slash Alameda is behind Bonk, you're intellectually dishonest. Then on the other end of the spectrum, you have Bonk itself saying Bonk represents the best of Solana. Our community is working together across the ecosystem to make positive change for us all. Now for a take that's sort of positive but isn't literally from the Bonk team, you could point to Elaine Live, a producer and host at Real Vision. She writes,

No idea what Bonk is, but I'm glad Soled Dip so I can experiment with its usability. The speed and low fees make these transactions fun. Salana CoreDev, Zen Lama, writes, Bonk is the advertisement for Solana's new network stability features we never knew we needed. Love to see it. I don't know, man, I'll leave it to you guys, my astute listeners to decide where on the cringe-to-king scale Bonk falls. I just thought it was notable that a dog coin showed up in the depth of winter in the first week of this year. Talk about things we can't quit. Now let's pop back to Bitcoin and talk mining for a moment.

A couple of key stories from the last few weeks. It's been bankruptcies or bailouts with pretty much nothing in between. On the bankruptcy side is the world's largest public miner core scientific. They filed for Chapter 11 bankruptcy on December 21st and had a pre-arranged restructuring plan agreed to by creditors. According to SEC filings, lodged last Thursday, Core Scientific received a $75 million loan from a group of debt holders, including $17 million, contributed from mega asset manager BlackRock.

BlackRock is the largest shareholder of Core Scientific and already held $37.9 million in convertible bonds issued by the minor. The new loan facility will mature in June this year with terms allowing an extension to September, meaning that the company needs to ensure its finances are reformed over the next 6 to 9 months. Now, on the bailout side is Argo. Argo blockchain narrowly avoided filing for bankruptcy itself, with Mike Novigrat's Galaxy Digital providing the trouble miner with a $100 million bailout.

The two parts of that are that Galaxy has purchased Helios, which is Argo's largest mining facility located in Texas for $65 million. And additionally, they provided a loan of $35 million. Argo CEO Peter Wall said, quote, Over the last few months, we've been looking for a way to continue mining through the bare market, reduce our debt load, and maintain access to the unique power grid in Texas. This deal with Galaxy achieves all these goals, and it lets us live to fight another day. Amanda Fabiano, head of mining at Galaxy, said, quote,

quality infrastructure and access to low-cost energy are the cornerstones of a successful mining operation, making the acquisition of Helios an incredible milestone for the growth of Galaxy's mining business. Helios will be the second mining facility owned and operated by Galaxy, with plans to complete construction on its first site in January. Now, if you are interested in more on what's going on in Bitcoin mining, tomorrow's Long Read Sunday is focused all about that, so check it out. Then when it comes to macro this week, there are two big parts of the story, I think. One of them was the Fed Minutes.

As we discussed on Thursday's show, it seemed in the minutes we got from December's FOMC meeting, pretty clear that the Fed was trying to fight against the prevailing wisdom in markets that market conditions will force the Fed to pivot. This has been the story going back throughout all of last year. The Fed's saying, we're going to keep tightening and the marketing saying we don't believe you. This time again, it didn't really impact markets, that all. More of a shrug, yeah, we get it, reaction. The other piece, though, has been economic data around jobs.

Remember, the Federal Reserve keeps pointing to labor market tightness as justifying further rate increases and generally keeping rates higher for longer. This is both from the standpoint of saying that wage price spiral could be an issue ongoing, as well as saying that clearly the real economy can handle more pain, given how strong the labor market is. Well, midweek, this week, we got data that unemployment claims actually dropped in the last week of December, and then on Friday, payroll data showed an increase of 223,000 jobs in December, with the jobless rate declining from 3.7 to 3.5%. This seems to validate the Fed's sense that

things are very tight. But, interestingly, some of the spin on Friday was that this was still a sign of labor market cooling. The Wall Street Journal writes hiring wage gains ease pointing to cooling jobs market. Quote, the U.S. labor market, while still vibrant, is losing momentum amid slower economic growth and Fed rate increases. December's job gains were the smallest in two years, while wage increases of 4.6% were the narrowest since mid-2021. Markets seemed to agree with the Dow up more than 500 points after the news. Colin Roche sums up, decent labor report. The most important component was wage growth, which continues to slow. This is in the 1970s, there is no wage price spiral. Still, things are weird out there. I think the Kobayisi letter captured this pretty well when

they wrote, current market mentality. One, economic data is stronger than expected. Sell stocks, Fed will be more hawkish. Two, economic data weaker than expected. Sell stocks, we are in a recession. Three, economic data as expectations. Sell stock Fed will keep raising rates. The Fed broke the market. And lastly, there is, of course, all of the crypto reckoning, but I did a whole show on that yesterday. I don't think you need me to repeat all of that, given that we just went over it so recently. The TLDR is that Celsius 3AC, Huobi, Silvergate, and SBF were all in the news. All of those bankruptcies and financial challenges are ongoing, and each week we get more information. But it's the weekend. That's not what you want to think about right now.

And I hope that the rest of the show has given you a sense of where we stand coming off this first week of 20203. As always, I appreciate you listening, and until tomorrow, be safe and take care of each other. Peace.