The Breakdown - Is the War on Crypto Actually Over?

Starting point is 00:00:04 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, March 2nd, and that means it's time for Longreed 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. Hello, friends. Welcome back to another long reads episode of The Breakdown. Today we're going to do two shorter pieces with a little bit of

Starting point is 00:00:43 analysis. They actually are not all that connected. They both roughly have to do with Trump's policies. But we're going to read one that I sort of disagree with, although appreciate it being put out there into the wild, and one that I'm a little bit more inlined with. The first one is by Robin Singh, who's the founder and CEO of Coimley, which is a crypto tax platform. That is definitely relevant in this case as his arguments come out of his own experience. And his piece is controversially, perhaps called why Trump's potential plan to make crypto gains tax-free could be a bad idea. The elimination of capital gains taxes on crypto might not be the huge boon to American investors that it would appear to be. So I'm going to turn it over to the AI me to read this,

Starting point is 00:01:21 and then we will come back and discuss it. In January, following Donald Trump's inauguration, reports emerged claiming that his son, Eric Trump, had confirmed that U.S.-based cryptocurrencies would eventually be exempt from capital gains tax, while non-U.S.-based cryptocurrencies would face a 30% tax. The elimination of capital gains taxes on U.S.-based cryptocurrencies might sound like a dream come true for American investors, but it won't come without a price. Whether it turns into a net negative for the global crypto industry, well, we'll just have to wait and see. But there are some glaring red flags. First markets may wobble after confirmation. If this new rule actually gets approved and takes effect, be prepared for market turbulence as U.S. investors could dump non-U.S.

Starting point is 00:02:03 cryptos, take the tax hit, and rotate some of their capital into domestic options. This could increase sell pressure on global projects, particularly those with significant U.S. investor exposure. But that would be the least of the concerns. This could have far-reaching long-term consequences for the entire crypto industry. Two, making this change before sound regulations are in place could be harmful. This elimination of taxes on crypto investments could trigger a surge in the creation of new cryptocurrencies from the U.S., similar to the 2017 initial coin offering, ICO, boom, in which nearly 80% of projects had collapsed or turned out to be scams within two years. If the U.S. government removes capital gains tax before implementing clear and solid

Starting point is 00:02:47 regulations, we could see a repeat of that chaos, but on a much larger scale. A zero capital gains tax would almost certainly lure in U.S. retail investors who've never dabbled in crypto, drawn by the obvious tax advantage. But if bad actors flood the space and take advantage of them, it could drive these newcomers away from crypto entirely. Third, potential harm to the global crypto industry. The U.S. may be home to major crypto projects like Cardano, Solana, XRP, and Hedera, but it's also been a breeding ground for scam tokens.

Starting point is 00:03:20 In 2024, the FBI even issued a warning about criminals creating fake crypto tokens that mimicked legitimate ones preying on unsuspecting investors. In addition, global crypto startups may have a more challenging time securing funding if U.S. venture firms start favoring local projects to maximize tax-free returns on token allocations. This could drain investment from emerging markets, where crypto is often used for real-world financial inclusion. Such a change would also likely bring back many U.S. firms back home after they left because of the SEC's enforcement-heavy approach under the Biden administration. Even if other countries jumped on the bandwagon with their own zero capital gains tax for local

Starting point is 00:03:59 cryptos, it might backfire. The market would likely be flooded with new tokens, trading would become more fragmented, and liquidity would dry up for most of them. While countries like the UAE and Cayman Islands already have zero capital gains tax on crypto, they apply it universally, not just to locally created crypto tokens. Conclusion. The U.S. taking this approach risks skewing the market, incentivizing artificial token creation and isolating American investors from the global crypto economy. What seems like a tax break now might end up killing competition, pumping money into scams, and hurting crypto's credibility in the long run. All right, back to the real NLW here.

Starting point is 00:04:38 So let's go through the different arguments and see how much I agree or disagree or where I might just have a different perspective. Robin's first red flag is the idea that markets may wobble after confirmation. Even he points out, however, that this is probably the least significant of the challenges, it's just worth noting. I agree that that could happen. I agree that it could be a short-term challenge, but I also agree that it's the least of them, so let's move on to the second. His second argument is basically that this could create, let's call them, challenging incentives or problematic incentives for new cryptos to be launched in the U.S. The thing is, it's not that he's wrong

Starting point is 00:05:12 that this could be a phenomenon that falls out of this, but it's less an argument to not remove the capital gains tax, and more just an argument for getting regulations in place. I think in this particular case, the regulations that matter most are whatever sort of safe harbor rules we have, hopefully coming out of Hester Purse and the SEC, and I don't want to be dismissive of his concerns that this could draw in a lot of retail who aren't necessarily ready or equipped to play in the space. Ultimately, though, to me, that's not a reason to make tax policy as it is. If we want to solve the problem of investor protections or disincentives for scams, we should solve those problems on their own terms, not just not have a different or favorable tax

Starting point is 00:05:50 treatment. On the last piece, the potential harm to the global crypto industry, I'm not so sure it would play out exactly like Robin thinks it would play out. I don't think that the concerns are illegitimate. I do think it would obviously create a significant incentive to build things here in the U.S. and that given how big the U.S. investor base is, that could create some liquidity challenges for others, but crypto is totally global at this point. It's got buyers and builders in every market in the world, and I think that the impact of incentivizing more stuff to be built here in the U.S. would be less about being negative for everyone else and more about it being positive for the U.S. industry. In general, I do think that crypto is a slightly weird place to apply the sort of

Starting point is 00:06:29 build it in the U.S. type of thinking that's happening in other parts of the Trump economic plan, but I just ultimately don't think that it would have as deleterious an impact on the global crypto industry as it seems like Robin thinks it does. Now, ultimately, like I said, even though I disagree with some of Robin's conclusions, I think it's really important to have pieces like this and debate policy. Part of the benefit of having a more pro-crypto administration and power is that we get to think about these second order consequences. So big ups to Robin for sharing this post. And I got to say that this is a set of problems that I would gladly take on relative to some of the other things that we've had in the past.

Starting point is 00:07:03 Hello, friends. I am thrilled to share that Ledger is once again partnering and sponsoring with the breakdown. Many of you know, but for those of you who don't, Ledger is the most secure hardware wallet for your crypto and logins. It's trusted by 7 million users and secures 20% the world's digital assets. What's more, Ledger is a lot more than wallets. Over the recent years, they've built a comprehensive ecosystem of products and services, all of which are designed to make digital ownership more secure and accessible. You can buy your Bitcoin with Ledger and Ledger Live, and so much more. Basically, not only did they want to keep your assets secure, they want you to be able to do more with them. Ledger's newest devices, the Ledger Stacks and Ledger Flex,

Starting point is 00:07:40 introduced the world's first secure touchscreens, making it easier and safer to manage your transactions and assets. Alongside Ledger Stacks and Ledger Flex, the company also launched the ledger security key app, offering a safer alternative to traditional passwords and enhancing your digital security. If you are in this space, you owe it to yourself to at least check out Ledger and their ecosystem what they have available to you. So thanks, once again, to Ledger for sponsoring the show. Second today, we're reading a piece by Renato Marriotti called The U.S. War on Crypto isn't over. Let's turn it back over to the AI version of myself, and then we'll come back for a little

Starting point is 00:08:14 bit of analysis. In the wake of the appointment of a U.S. crypto czar and the announcement of comprehensive crypto legislation, many believe the era of regulation by enforcement in the U.S. is over. But while the SEC and CFTC now have crypto-friendly chairman, both state regulators and attorneys general are poised to take their place as aggressive crypto enforcers. For years, the SEC's aggressive regulation by enforcement approach stifled the growth of the crypto industry and caused many to call for a comprehensive regulatory framework that would put an end to the war on crypto once and for all. For this reason, many in the industry banded together to lend their support to pro-crypto candidates. That strategy bore fruit. Donald Trump was elected as the first president

Starting point is 00:08:58 to tout his support for the crypto industry, despite his somewhat antagonistic stance towards crypto during his previous term. Since taking office, Trump appointed David Sachs as the nation's first crypto czar, established a president's working group on digital asset markets and appointed interim SECC and CFTC chairs that have already been expressing their support for the crypto industry. But those federal changes won't end aggressive enforcement actions from state regulators who face public pressure to take action to rein in crypto. Many in the industry have already faced aggressive enforcement from regulators like the New York Department of Financial Services, NYDFS, which recently obtained a $37 million settlement from a crypto lending platform.

Starting point is 00:09:41 Regulators like NYDFS were aggressive even when the SEC engaged in aggressive tactics against crypto, so when the SEC scales back its efforts, you can expect them to fill in the void. Other states are following New York's lead. In late 2023, California enacted the digital financial assets law, which empowered its Department of Financial Protection and Innovation to license and regulate digital assets. And the Illinois legislature recently began to consider a new bill called the Digital Assets and Consumer Protection Act that would empower the state to regulate any company engaged in digital asset business activity with an Illinois resident. State Attorneys General It's possible that new federal legislation could limit the ability of state regulators to bring

Starting point is 00:10:24 their own enforcement matters. On February 4, House and Senate committee chairs expressed confidence in the passage of comprehensive legislation that would create a regulatory framework for crypto within the next 100 days. Because federal law preempts state law, the new legislation could rein in some state regulatory activity. But even if state regulators are hemmed in by new legislation, that legislation would not limit the ability

Starting point is 00:10:47 of state attorneys general to file lawsuits alleging fraud by crypto-related businesses. State AGs previously brought those lawsuits when the SEC's Regulation by Enforcement Crusade was in full swing. In 2023, New York Attorney-Jurney-July. General Letitia James filed a lawsuit alleging that a crypto trading platform falsely represented itself as an exchange. Later that year, the platform settled for $22 million and agreed not to do business with New Yorkers going forward. To be sure, a national regulatory framework and having pro-crypto

Starting point is 00:11:17 regulators in Washington will provide more certainty and predictability for the crypto industry. But anyone who believes that regulation by enforcement is at an end is naive. You can still expect aggressive lawsuits and regulator activity in the years to come. The venue may move from the SEC to the states, but the impact on crypto businesses and their customers will remain. All right, back to regular NLW here. To me, ultimately, this is less some big hot take and more just a warning and a reminder to not take anything for granted. And that is where I am in complete agreement with this author. We've seen how fast things can change both for good and bad, and in the U.S., part of the the beauty and chaos of the system is that it is a messy complex process where different regulators

Starting point is 00:12:04 have different types of authority that can still create lots of problems. I think it matters to stay vigilant. I think it matters to keep our policy groups well funded. I think it matters to not take anything for granted. And so for that, I am grateful for this reminder. That, however, is going to do it for today's breakdown. Appreciate listening as always. Until next time, be safe and take care of each other. Peace.

The Breakdown - Is the War on Crypto Actually Over?

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