The Breakdown - Is the US Government at War With Itself Over Crypto Regulatory Authority?

Episode Date: August 14, 2021

On this week’s “Breakdown Weekly Recap,” NLW looks at some reported emerging tension around which U.S. regulatory body holds authority over crypto.  The U.S. Treasury has revealed its heavy hand in the infrastructure bill process, and it isn’t the first Treasury Department to have a problem with crypto. SEC Chair Gary Gensler is asking Sen. Elizabeth Warren for more authority for his organization. Meanwhile, the CFTC is publicly saying regulatory authority lies with it, not the SEC.  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=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Tidal Wave” by BRASKO. Image credit: Andrew Harrer/Bloomberg/Getty Images, modified by CoinDesk.

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 Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Saturday, August 14th, and listen, I get the impression that y'all are a little fatigued with all the regulatory stuff. I mean, it has been nonstop, it seems never-ending. It involves people who either don't really understand. understand what we're doing over here or who just don't give a crap about it. And it isn't really about the underlying developments and transformations that make this space so interesting. And it

has made up a lot of our coverage here at the breakdown. So if that's you, I totally hear you. I hope yesterday's Bullish Signs episode was a nice breather. And where possible, I'll be trying to focus on some other things to give us all a reprieve in the weeks ahead. But I did want to use this week's weekly recap to provide a denou ma to the regulatory inflection point story we've seen over the last few weeks. And here's the TLDR and why it's interesting to me. There are some indications that the Biden administration has a fair bit of turf war going on over who's supposed to actually be regulating crypto. So, let's dig in. Of course, for the last couple weeks, it has been the infrastructure bill that was the biggest focus around crypto regulation. That was nominally the Senate and Congress being

involved in regulation, right? It was, after all, a Republican senator, Rob Portman in charge of the negotiations around the infrastructure bill who put the original crypto provision in. It was bipartisan senators who got upset and tried to change that language with their amendment. It was another group of bipartisan senators who offered a counter amendment. And then those two groups of bipartisan senators ultimately got together to offer a bipartisan compromise that, were it not for some procedural BS, would have passed. So, seems like a lot of the crypto regulation we've been talking about was coming from actually elected officials, right? Well, maybe not that. so much. We found out over the course of the infrastructure bill story that the Treasury Department

had been extremely involved in the process. They had in fact been instrumental in writing the actual language from the beginning. As Jake Trevinsky explained on the show yesterday, initially the blockchain association and Coin Center and others thought that the language in the crypto provision was just straight up a mistake, that it must be Congress not understanding what the hell they're asking for. That's the only plausible explanation. quickly learned, however, that it was not a mistake. Instead, it was the Treasury Department, again, a not-elected body, trying to paint with an extremely broad brush in order to give themselves as much power to write the rules as they saw fit. Now, it's hard not to make comparisons

to the 11th hour push from the previous Treasury Department, under Secretary Stephen Mnuchin, to use a change in the FinCEN rules to give itself expanded jurisdiction over crypto. And given that FinCEN game, which ultimately we were able to turn back, and how much of the initial language in the infrastructure bill was around non-custodial actors and dexes, it's clear that the thing that scares Treasury is in fact the parts of the ecosystem that aren't traditional brokers. Think about that pernicious language of an unhosted wallet. Imagine that every time you put a $20 bill in your wallet and took it out and spent it, that wallet had to report that information to the IRS.

That's literally the type of financial surveillance we're talking. talking about here. An unhosted wallet isn't unhosted. It's just hosted by the private, sovereign individual. That language is a term itself designed by people who want to make it seem like sovereignty and liberty over one's money is an accident of history rather than a norm and a human right. By the way, that FinCent attempt wasn't the first time Stephen Mnuchin and Trump's treasury had their fingerprints on crypto things. When Donald Trump wrote his famous tweet saying that he was, quote, no fan of Bitcoin and going after Facebook's Libra, most thought that the sentiment, if not the language itself, had come from Mnuchin's treasury. It has been formally revealed that most of Trump's

conversations about crypto and his perspectives on it were shaped by Stephen Mnuchin. So it seems like we are two for two in treasury departments who just don't like us. Indeed, I talked to one DC insider who put it this way, and this is roughly a direct quote. They just fucking hate us. I mean, of course they do. They watch this industry transforming money and finance, and they can't control it. Now, for me personally, the Treasury Department isn't necessarily the enemy I would have picked, but we should also note that in both the cases of the FinCEN rule and this most recent infrastructure bill, the grassroots power of the crypto community seriously impeded the Treasury's ability to get its will. Yellen herself had to lobby members of the Senate to support

the Portman-Warner-Counter amendment and to not support the Tumi-Lumis-Widen Amendment. She even called Senator Wyden the Democrat and Senate Finance Chair and could not flip him. One of the most important developments in this space is that community banks, regional banks, and credit unions can now start offering Bitcoin to their customers. That's right. Checking, saving, and now Bitcoin. It's all happening seamlessly thanks to a platform by NIDIG that offers institutional-grade custody and compliance. They're also the sponsor of The Breakdown. And if you want to find out more, go to Nidig.com slash NLW.

That's NYDIG.com forward slash NLW. So we've got the Treasury who clearly wants authority, but we also have the SEC, and man is opinion shifting quickly in the crypto industry on Gary Gensler, or as Masari's Ryan Selkis is now calling him Goldman Gary. The crypto community was filled with optimism at Gensler's appointment. He had been, yes, a serious antagonist to Wall Street, but he had also taken the time to deeply understand our industry. He even taught a course on it three times at MIT in between its government stints. In recent speeches, we've seen a person who does clearly revere the innovation of Bitcoin

and who has spoken glowingly about Nakamoto's innovation. Everything else, it is increasingly clear, can go pound sand. To give some context, let's talk about another SEC commissioner, Hester Purse's main complaint with the previous SEC under Jay Clayton that she was a part of. This complaint was that, one, the SEC regulates through enforcement rather than by proactively articulating their beliefs, and that, two, there was no provision made for the possibility that a framework, the Howie Test, created in the 1930s, may no longer be completely suited for regulating financial instruments 90 years later. Unfortunately for Commissioner Perce and for us, Gary seems pretty intent on keeping that frustrating status quo. He has repeated in speech after speech that the Howie Test

works for all securities, including cryptos, and that we don't need to go much farther than that. Reinforcing Commissioner Pers's point about regulating through enforcement, there was a recent $10 million fine slapped on Polonex from something like activities four years ago, but it never said which assets it was selling that were deemed securities. When Gensler spoke at the Aspen Institute a couple weeks ago, I asked Commissioner Perce about her response to his speech, a speech in which he had reiterated many of those same themes, and she tweeted, nice to see Gary Gensler addressing crypto issues, but the existing security's laws don't work well for certain aspects of crypto, and people's freedom to interact using new technology

has produced the innovation at the core of our prosperity. Looking forward to working together. Adding an interesting wrinkle to the Gensler side of the story, a couple months ago, Senator Elizabeth Warren wrote a letter to Gensler asking him to clarify what he thought his authority was or what authority he needed to regulate crypto. His letter was sent back on August 5th, but just published this week on the 11th, and more or less restated what we've seen before. The last line of the letter was, I believe we need additional authorities to prevent transactions, products, and platforms from falling between regulatory cracks. We also need more resources to protect investors in this growing and volatile sector. In my view, the legislative priority should

center on crypto trading, lending, and defy platforms. Regulators would benefit from additional plenary authority to write rules for and attach guardrails to crypto trading and lending. I'd just like to pause here and say that sometimes I feel like I'm going to have a f***ing aneurysm when we have to talk about this paternalistic notion that investors need to be protected from themselves. It is one of the most frustrating, dismissive, starting from a place of negative belief and underestimation of people's capacity to make decisions from themselves, things that I can imagine. Let's also talk about how in this context, at least, how wrong-headed it is. I've said before that if your financial advisor told you not to buy Bitcoin three years ago,

they should be fired. That's on the basis of the fact that in nearly every year, year of its existence, it has been the best-performing asset. This industry has gone from nothing to a couple trillion dollars in a decade, and the folks that have had high conviction and long-term held have been part of one of the more extraordinary wealth creation experiments in history. That is, apparently, the reality that investors should be protected from. All right, now that I've expressed that much larger overarching frustration about having to have this discourse at all, I can get back to the main thread. Going back to Gensler's letter to Warren, most in the media interpret interpreted the letter as him asking for Warren's help in getting greater authority to regulate crypto.

And boy oh boy, is that sentiment not sitting well with all the other departments that touch crypto in the U.S. government. On August 4th, a day after Gensler's Aspen speech, former CFTC chair Christian Carlo tweeted, only one U.S. regulatory agency has experience regulating markets for Bitcoin and crypto, and it is not the SEC. It is the CFTC. If the Biden administration is serious about sensible cryptocurrency regulation, it needs to not. nominate a CFTC chairman. Current CFTC Commissioner Brian Quintends was even more vocal, tweeting just so we're all clear here. The SEC has no authority over pure commodities or their trading venues, whether those commodities are wheat, gold, oil, or crypto assets. Perhaps that it isn't

all that surprising that on August 11th, Fox Business dropped a piece titled Crypto Wars, Biden administration at war with itself over regulation. Subtitle, no one is entirely sure whether cryptocurrencies qualify as a security, a commodity, or a separate currency. Now, some of you may find Fox an unreliable narrator, and that's fine. That's your grain of salt warning. But as you can see from what I've said so far, maybe their theme doesn't seem so crazy. So let's read the top of the piece. Fox Business has learned that two and possibly as many as three agencies inside the Biden administration are at odds with each other over who will take the lead in regulating cryptocurrencies and the broader digital coin business. Complicating matters,

Senator Elizabeth Warren, Democrat from Massachusetts, may be tilting the scales in favor of one of them, according to people with direct knowledge of the matter. People at the Commodity Futures Trading Commission, widely considered by securities lawyers to hold the most statutory authority to regulate crypto, said that Warren has been quietly assisting the efforts of the Securities and Exchange Commission Chair Gary Gensler to become Uber regulator of digital currencies. These people who spoke on the condition of anonymity said Warren appears to be backing the development of new legislation that would give the SEC enhanced powers to regulate crypto. Warren, a ranking member of the Senate Banking Committee,

and Gensler, a former Wall Street executive, academic, and securities regulator in the Obama administration, are longtime associates who share many of the same approaches to reining in what they believe are abuses in the financial markets. Another regulator, the Consumer Financial Protection Bureau, is also weighing whether it should regulate the crypto business Fox Business has learned. So this kind of ties everything together that we're seeing.

we're seeing from Warren to Gensler to the CFTC. And then, of course, as we mentioned, there's still the Treasury there. And speaking of which, on top of all of this, there's Representative Don Bayer, who in the midst of this infrastructure bill madness dropped an extremely long proposal for crypto legislation. Given that Byer had literally never mentioned crypto or been a part of crypto-legislative conversations,

other representatives, including Blockchain Caucus co-chair Tom Emmer, straight up accused him of being just a puppet for the Treasury. I don't know, man. what's clear is that this is a bigger issue than it's ever been. The hounds of war are barking. I'm not in these political battles other than to cover them from the sidelines, but it seems pretty clear that there are turf wars, and not to be too Machiavellian about it, but political turf wars and discord are pretty much the enemy of coherent policy. That could be good with too much

infighting to get much done, or it could be very bad, such as with Treasury lobbing bombs in from the back like this sleazy infrastructure bill move. What's clear is that it's going to get a little while in the months and weeks to come. So buckle up. I hope you're ready. And from now, I hope you're having like a great barbecue or something so you can not think about this for a few minutes. Hopefully you have a better picture of what's going on over in our lovely swamp. But until tomorrow, guys, be safe and take care of each other. Peace.