The Breakdown - Kamala's First Comments on Crypto Spark Yet More Controversy

Episode Date: September 24, 2024

For the first time this campaign cycle, VP Kamala Harris has mentioned crypto. Some are excited, some are skeptical, and many just don't know what to think at this point. 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 Monday, September 23rd, and today we are talking about Kamala Harris's first comments about crypto. 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 of the show notes or go to bit.ly slash breakdown pod. Well, friends, it has finally happened. Vice President Kamala Harris has made her first direct statement on crypto policy. At a New York fundraising event on Sunday, she said, quote,

I will bring together labor, small business founders, and innovators in major companies. We will partner together to invest in America's competitiveness to invest in America's future. We will encourage innovative technologies like AI and digital assets while protecting our consumers and investors. And that's it. Now, this is broadly in line with the direction the Harris campaign. pain has been going with economic policy, an agenda they are calling the opportunity economy. The message has included overtures towards sensible regulation and cutting red tape.

At the same event, Harris said, we will create a safe business environment with consistent and transparent rules of the road. We will invest in semiconductors, clean energy, and other industries of the future, and we will cut needless bureaucracy. Previously, the crypto industry had been left guessing whether they would be included among these industries of the future or continue to be cut out by regulatory attacks. This is at least some indication that, yes, indeed, we are a part of the future that Kamala Harris sees. It's also notable the context in which this message was delivered. The event was held at Cypriani, a lavish event space right at the heart of Wall Street. It was billed as the last opportunity for wealthy donors to meet Harris before the election

and priced accordingly. Tickets ranged from $500 right up to a million dollars for entry to an exclusive luncheon and reception. It appears then that the pro-crypto message was aimed at Wall Street bankers looking for certainty about their investments, as opposed to, for example, specifically the crypto-native community. Still, for Democratic faithful who have been looking for any sign that a Harris administration wouldn't stomp out their industry, this seemed like a good start. Investor Adam Cochran commented, progress moves slowly, but it does move. There is your first formal statement directly from Harris that is reasonably pro-digital assets, proving that the naysayers who thought it not being in her platform with some evil plan had no idea what they were talking about.

Harris has no ideological bent on tech or finance, so long as it's not a Wild West cesspool. Then she will engage with whatever improves the American economy and U.S. technical supremacy. The majority of the industry you will be unsurprised to find is still skeptical. There was an absolute deluge of commentary from those who are already decided on Trump, but that position is already extremely clear. More interesting were comments from those that are somewhat in the middle. Jake Trevinsky, the chief legal officer at Variant Fund, wrote, This is Progress and Progress is Good, but while protecting our consumers and investors

could mean a lot of things, the anti-crypto Army uses consumer protection as a smokescreen to conceal their attempts to destroy our industry. I, for one, want to see policy details. Fariar Shirazahirazah, the chief policy officer at Coinbase, is a little more willing to give the benefit of the doubt, tweeting, there is an important and constructive statement from Kamala Harris. It's not nearly as forward-leaning as the concrete and visionary positions taken by Donald Trump, but it's still notable because she recognizes digital asset innovation as being important and on par with AI. She understands that there's a path that promotes innovation while protecting consumers and investors, and her statement comes after weeks of outreach by her inner circle, who are thoughtful and open-minded on crypto.

In D.C., presidents send signals for good or bad. Joe Biden let it be known that Senator Warren controlled financial regulation, so we had a mindless and destructive multi-year war against U.S. innovation. Kamala Harris going out of her way to mention crypto should send a clear message that the Biden-Woren era of destruction is over. We should press for more, but her statement today means a lot, and we should recognize that. When going through the reactions on crypto Twitter, this is a fairly common take. In other words, that this statement from Harris by itself is certainly not enough after the onslaught

of the past few years, but that it would also be foolish to write it off as just meaningless. Hasbobo, a governance advisor across multiple defy platforms commented, The usual suspects will say, don't believe this, she's just pandering. Aside from the same obviously being true for Trump, it's positive EB to not outright reject these good faith attempts from the Harris campaign. Neither side was good for crypto when in power. Let's wait and see. Hayden Adams, the inventor of Uniswap, sits in an interesting position heading into this election.

He is both a vocal Democrat supporter and staring down one of the most consequential SEC enforcement actions of this era. His initial tweet was extremely neutral, merely pointing out that Harris made her first positive statement on crypto with no further commentary. After an hour of surveying the replies, he added, a lot of people mad in the comments. Yes, Biden has been bad for crypto and actions will speak louder than words. Progress is progress. It needs to start somewhere and it should be encouraged. A positive statement on the tech is more than we got under the Biden and Trump presidencies. This likely means that as we head into the election, we're not going to get more

than winks and nods from the Harris campaign. It's clear they're being cautious on public statements about the topic, likely in part because crypto is an unpopular issue for some pockets of their voter base. Ultimately, this isn't really a statement for the undecideds. I don't think that the Democrats think that they're going to win over independence by being pro-crypto. As I've said before, I think that there are a group of crypto-progressives who are not under any circumstances willing to vote for Trump, save perhaps the literal outright destruction of the industry where they make their living. For those folks, they are looking for any signal that they are not going to have to pack up and move to Malta or something. And for them, this is going to be a good start. However, for the average

crypto person? I think the general difference of the candidates was summed up by Marty Bent, managing partner of 1031 Ventures, who tweeted, the week that was for the presidential candidates in NYC. Kamala attended a star-studded fundraiser in Manhattan and gave vague policy proposals about digital assets. Trump bought burgers with Bitcoin at a dive bar and engaged directly with Bitcoiners at a small business. Hello, friends. Before we get back to the rest of the show, I want to implore you to join me at Permissionless. Permissionless is the conference for crypto-natives by crypto-natives, and the reason it's so important this year is that despite regulators' best attempts to push industry founders, devs, and executives out of the U.S., the United

States remains the beating heart of crypto. Today, the tide is turning. Policymakers have pivoted from fighting crypto to embracing it. Literally now, we are in a major political party's platform, which will lead ultimately to the creation of new financial products, new applications, and ultimately new adoption. Permissionless is the conference for those using and building on-chain products. It's home to the power users, the devs, and the builders. And perhaps more importantly, I will be there.

The location is Salt Lake City, the dates are October 9th to the 11th, and tickets are just $499. If you want to get 10% off, use code Breakdown 10. Go to the Blockworks website, blockworks.com. There will be links to register for the conference, and again, you can use code Breakdown 10 to get 10% off. Now, almost as if to be a reminder of the risk of continued policies, we turn to the Silvergate situation. Last week, Silvergate Bank filed for bankruptcy after over 18 months of winding down operations. The bank had been one of the major crypto banks in the U.S. It suffered major losses

as a result of the FTX collapse, with the exchange being one of their largest clients. In March, 2023, the bank announced they would voluntarily liquidate after suffering of bankrun. Silvergate was the first bank to fail that spring, and had been the subject of an intense campaign of fear from shortsellers and Senator Elizabeth Warren herself. The crypto bankruns of 2003 were the subject of a huge amount of speculation about a regulatory crackdown going on behind the scenes, which became known as Operation Chokepoint 2.0. With the bankruptcy finally underway, Silvergate executives are able to speak about what really happened. Elaine Hettrick, the bank's chief administrative officer, filed a 132-page declaration telling the entire story.

Hedrick said that the bank was badly damaged by the collapse of FTX and the subsequent bank run, but remained solvent and able to operate. She pointed to a study from the St. Louis Fed, which detailed the speed and size of bank runs dating back to 1984. Silvergate was the only major bankrun they looked at that did not result in insolvency. This conflicts with the prevailing narrative that Silvergate was an irresponsible bank that had blown itself up due to poor reserve management. That position was encapsulated by an Elizabeth Warren tweet from that fateful weekend in March, which stated, As the Bank of Choice for Crypto, Silvergate's bank failure is disappointing but predictable.

I warned of Silvergate's risky, if not illegal activity, and identified severe due diligence failures. Now customers must be made whole and regulators should step up against crypto risk. What really did Silvergate in, however, according to Hetrick, was the Stanford Francisco Fed, telling them they needed to reduce crypto clients to just 15% of their business. She wrote, The increased supervisory pressure forced Silvergate Bank to a point where it would have needed to remake its business model away from its focus on crypto asset businesses, seek to sell itself in the shadow of regulatory overhang, or begin winding down its affairs.

She claimed that the public signaling from regulators made it clear they would, quote, not tolerate banks with significant concentration of digital asset customers. VC Nick Carter has, of course, been chronicling Operation Chokepoint 2.0 from the beginning and wrote a thread on packing this new filing. He wrote, Hedrick's testimony is so important because it's direct on the record under penalty of perjury evidence of what we have known all along, but no one has been willing to admit. The Biden admin directly forced Silvergate out of business. They did not die on their own due to mismanagement or bad trades. They were killed because the Fed said they weren't allowed to service crypto clients

as a bank. And when they liquidated, the crypto lines of business were tossed in the garbage, rather than being allowed to continue to exist. I'm still so fired up about this over a year later because the popular narrative around Silvergate and signature is, oh, they just made stupid balance sheet mistakes, when the truth is they were taken out bank and shot by their own regulators. The fragility of the crypto banks was worsened by folks like Senator Warren publicly calling for a bank run and making false allegations that these banks had criminal exposure to FTX, which proved to be a huge lie. The fact that a sitting senator encouraged a bank run is completely insane, by the way. If we let the Biden and men pretend they did nothing wrong and these banks just happen to die

on their own, they will do it again. As I write, they are still actively engaging in the suppression of the crypto industry via the deprivation of banking. If you are an entrepreneur or have any exposure to crypto, you should be upset about this too. They are targeting your livelihood and making it impossible for you to operate normally, by making banking inaccessible and expensive. Austin Campbell, founder of Zero Knowledge Consulting and Veteran Banker also weighed in, writing, My worst fears have been realized. Many will think that this proves that Operation Chokepoint 2.0 is real. and here's the thing. I've known that for a while. What was not known to me was whether OCP 2.0 was founded on a concern about sophisticated understandings of the crypto connections to the

traditional financial system, or rather if it was based merely on technophobia and aversion to new technologies where the banking regulators were throwing the baby out with the bathwater. Well, my dear reader, I am here to tell you that I was wrong. There is a third option. That third option is that banking regulators actually have no idea what is going on, and are going to take steps that demonstrate a profound misunderstanding of risk and will make the banking system more, not less fragile. What stands out to me like a sore thumb is the 15% limit on crypto deposits. This action demonstrates that banking regulation is stuck in the 1970s. Well, maybe the 1980s if we're being charitable, because the problem here was not crypto deposits. Rather, it was

antiquated thinking about asset liability matching and how to manage your aggregate balance sheet exposure. The problem is not unique to crypto, and it's also what killed Silicon Valley Bank, and that was an entirely non-crypto-related problem. Campbell went on to explain that a 15% cap on crypto-related deposits can only serve to spread those customers throughout the banking industry. Servicing crypto clients comes with a host of unusually complex challenges for compliance. is concerned that bad actors will now be able to seek out tiny banks that are not up to the task of adequately monitoring crypto clients, quote, maximizing the amount of financial crime that will occur. He concluded, it's not the way we should be handling this problem in response to the issues

we actually had, and confirms my real fear. Our banking regulators appear not to understand systemic risk in the banking system and are just hammering square pegs into round holes and acting like 1970s methods address 2020's deposit risks. This deposit flight problem is not unique to crypto, see Silicon Valley Bank, and this being the answer is deeply concerning and should cause everyone to upgrade the probability of bank failures going forward, not downgrade it. But perhaps to end once again on the theme of progress where we started, it appears as though the Bank of New York Mellon has been granted an exemption from the SEC and will be allowed to start custody in crypto. Last week at a Wyoming state legislature hearing, Chris Land, the general counsel for Senator Cynthia Lummis said,

BNY is looking to get more involved in the crypto custody business. They had some problems with SAB-121, and the SEC has apparently given them some kind of variance from SAB-121 to move forward. In early 2021, BNI built out a crypto division with a view to launching custody that following year. These plans were brought to a screeching halt in March 22 when the SEC issued SB 121. Those accounting rules required custodians to hold customers crypto assets on their own balance sheet. Due to capital requirements, this made banks functionally unable to offer custody. Earlier this year, SAB 121 faced a showdown in Congress, with both houses voting to repeal the rule. The president vetoed this repeal, but there were rumors that the SEC was working behind the scenes to offer exemptions.

This is the first suggestion that an exemption has been issued, paving the way for a large custody bank to enter the crypto space. BNY will still need to obtain a non-objection letter from their banking regulator, the New York Fed, before the service could launch. Now, some Wyoming lawmakers viewed this as an example of federal regulators picking winners. Cyrus Western, the chair of the state legislature's committee on blockchain said, folks like Custodia, Crackett, and Bankwise, who have played by the rules this entire time, they're just kind of getting stuffed in the corner, being ignored while clearly there is a game favorite. Caitlin Long, the CEO of Custodia isn't sensed, tweeting,

the Fed says digital assets are a threat to financial system stability when a Wyoming Bank provides custody services, but the Fed then approves a global systemically important bank to provide the same custody services. There are no words. Others, though, are taking a wider view at how big a deal this could be. Nate Garassi, president of the ETF store tweeted, if true BNY Mellon will be able to custody crypto, huge development for ETFs in crypto space in general. BNY is a major ETF custodian. That said, it shouldn't take an exemption from SEB-121 to make this happen, not to mention government picking and choosing winners.

Crypto rumor aggregator Andrew at AP Abacus thinks this is just the first of a string of announcements tweeting, more global systematically important banks will soon be leaked announced alongside BNY. Expect similar announcements for J.P. Morgan, Goldman, Goldman Sachs, and others. We will, of course, keep an eye to see whether that happens. However, for now, that is going to do it for today's breakdown. Appreciate you listening as always. And until next time, be safe and take care of each other. Peace.