The Breakdown - Massive Expansion of Crypto Sanctions Power Snuck into Senate Budget Proposal

Episode Date: June 12, 2024

Yes, they're trying to do it again: sneak a massive expansion of anti-crypto powers into a bill that has nothing to do with crypto. Same play as the 2021 infrastructure bill. This time, however, the crypto political machine is watching much earlier. 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 Tuesday, June 11th. And today, well, we are looking at a bunch of different things. We've got a Senate sanctions bill. We've got some pre-FOMC price action. But of course, before we get into all of that, 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, let's start with a little bit of price action. Bitcoin price continued to slide overnight falling back below $67,000. Technical analysis were ringing their hands over the loss of the $69,000 support level. Keith Allen, the co-founder of Material Indicators said, sure, we have some bid support in here, but not a heavy, heavy concentration of it. And really, it's not even heavy down to $60,000, if I can be completely honest. Beyond the Fed meeting, this week features a confluence of major macro data. CPI inflation and labor earnings reports will be released on Wednesday morning ahead of the FOMC press conference.

Producer prices will be published on Thursday. CPI data is expected to show a slight cooldown in headline inflation, but core inflation is forecast to remain sticky and above target. More experienced traders pointed out that derisking is typical heading into the FOMC meeting. Gumshu wrote, this is a scam dump. There have been four FOMCs in 2024. Every single one of them had the same scam dump. Bitcoin dumped 10% in the 48 hours before all of them. On FOMC day, it recovered the entire move. The market always prices. in overly bearish sentiments, then reverses. CoinMamba added, dump before the FOMC, pump after. That's how it works.

Jelly gave out a dose of opium tweeting, Powell's press conferences have been good for the market recently. In fact, the past four FOMC events have all coincided with local bottoms and 20% rallies for Bitcoin. With the next presser taking place on Thursday, a bounce could be closer than most people think. While the pattern is pretty clear, we haven't seen an FOMC meeting so far this year with such a wide range of potential outcomes. Last week, the Bank of Canada and the ECB delivered their first rate cuts, which could influence the Fed to give a more solid indication of when they plan on joining in the cutting cycle. Senators Elizabeth Warren and Jackie Rosen also wrote to Powell on Monday to

urge rate cuts. They said that monetary policy is driving up the cost of housing and auto insurance to lingering components of high inflation. The senators wrote, you have kept interest rates too high for too long. It is time to cut rates. On the other hand, last week's hot payroll data suggests that rate cuts aren't appropriate at this stage. There's absolutely no expectation that the Fed will deliver a surprise rate cut on Wednesday, but there's scope for Powell to deliver his first hawkish press conference of the year, especially if May inflation data comes in hot. Bitcoin ETF traders seem to have heavily de-rised coming into this week. The ETF saw heavy outflows on Monday breaking a 19-day streak. Almost 65 million was redeemed from the products,

with GBT, Invesco, and Van Eck, all seeing big outflows. Lizanne Saunders, the chief investment strategist at Charles Schwab noted that de-risking isn't limited to Bitcoin, but extends to this year's outperformers more broadly. She tweeted, massive outflows for U.S. large-cap ETFs over the past week, while government bond funds had largest inflows followed by Munis, some interest in U.S. small caps as well. Next up, let's talk about the Senate sanctions bill. A massive expansion of crypto-sanctions powers has found it way into a Senate budget proposal triggering industry concern. A bill intended to fund U.S. intelligence operations has had a section inserted from a previous crypto-AML bill.

The language is borrowed from a bill proposed last year by Senators Warner, Jack Reed, Mike Rounds, and Mitt Romney. This is separate from Senator Elizabeth Warren's pet crypto sanctions bill, but no less troubling. The Warner bill would allow the Treasury to target sanctions at, quote, foreign digital asset transaction facilitators. The issue is that this term seems to be something of a catch-all. It would clearly apply to crypto exchanges, but could also sweep in software developers and non-custodial crypto infrastructure. This measure would not only ratify the tornado cash sanctions, but would allow sanctions to be used as a blunt instrument to address a wide range of crypto-AML problems. The bill also seems like it would expand existing KYC and

AML compliance regimes to cover DeFi and other non-custodial infrastructure. The second problem is that these sweeping new powers seem to have been inserted with a bare minimum of consideration before the Senate. The bill is called the Intelligence Authorization Act and is a routine broad-scope funding bill. Last week, the bill was passed through the Senate Intelligence Committee in a unanimous vote. A press release announcing committee approval covered dozens of new powers granted to the intelligence service, but made zero reference to crypto or digital assets. That gives a sense of how buried these new powers were within the 264-page omnibus bill. As the bill has only just passed the committee stage, it's unlikely to make it through a vote in both chambers of Congress before the year is out.

to become laws more likely to be bundling into the Must Pass National Defense Authorization Act. That annual bill has become the vehicle for most government funding in all manner of unrelated legislation. Now, if you're getting a sense of deja vu here, you are not alone. This is essentially the same pathway taken by a giant shake-up for crypto taxation, which was shoehorned into the 2021 infrastructure bill at the last moment. Getting blindsided by those provisions spurred the crypto industry to expand its lobbying engagement in Washington, largely to ensure that would never happen again. This time around, the crypto lobby has identified the problems at an early stage. so have the opportunity to engage with lawmakers. Cody Carbone, the chief policy officer for the

digital chamber, said, we've chatted with Warner staff on this and they're open to broader engagement here from the industry. I think it likely does get zapped out of the NDAA process given the immediate pushback from the industry. He noted that the bill's intention is well supported, but the sweeping powers are an issue, adding, overall, we're aligned with the goal of the legislation to cut off funding for foreign terrorist organizations, and I appreciate that it limits coverage to those groups that have knowingly facilitated funds to bad actors. Carbone explained that the bill fails to limit how sanctions would be targeted, essentially giving complete authority and discretion to the U.S. Treasury Secretary. Peter Van Valkenberg, the head of research at Coin Center, published a short article

addressing his issues with the bill. He recognized two important limiting principles. First, that sanctions cannot apply to U.S. persons operating crypto infrastructure. And secondly, that the bill requires that sanctions can only be applied where a person knowingly facilitated significant transactions with terrorists. Van Valkenberg's major issue, then is that if a foreign Bitcoin miner or validator on a proof-of-stake network is placed under sanctions, then U.S. citizens could inadvertently interact with them breaching those sanctions. He claimed that, quote, An American could be liable merely for broadcasting their transaction message to the larger network

if the miner who ultimately put that transaction into a block happened to be one of the sanctioned minors. If that is how the law is applied, it would have some massive implications for the functionality of decentralized and permissionless crypto networks. More broadly, Van Valkenberg suggests that existing sanctions authorities are more than enough to deal with the problems of crypto money laundering and shouldn't be expanded. Vin Valkenberg argued that U.S. citizens should only be liable if they knowingly and willfully transact with a sanctioned person. Further, he argued that the bill should include limits to protect free speech and the ability to write code. Ben Valkenberg concluded,

Without these improvements, the proposed law is a trap for innocent Americans who simply want to use and build cryptocurrency technologies for good. Hello, friends. Before we get back to the rest of the show, I want you to join me at Permissionless. Permissionless is a 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 U.S. remains the beating heart of crypto. Today, the tide is turning. Policymakers have pivoted from fighting crypto to embracing it, which will lead to the creation of new financial products, new applications, and ultimately

new adoption. Permissionless is a conference for those using and building on-chain products. It's home to the power users, the devs, and the builders. And what's more, I'm going to be there. The location is Salt Lake City. The dates are October 9th to the 11th, and right now tickets are just $199. towards the end of the month, they're going up to $499, and if you want 10% off, use code breakdown 10 when you check out. If you go to the Blockworks website, blockworks.com, there will be lots of information about how to register, and again, use code breakdown 10 to get 10% off. Moving into the Wonky section of today's show, a group of Salana validators has been removed from subsidy programs over MEV exploits. The Salana Foundation announced that more than 30 validator operators have been kicked out of their delegations.

program. They were detected participating in Mempools which facilitate sandwich attacks on retail users. Sandwich attacks are when an MEV bot front runs and backfills a blockchain transaction, increasing the price of a token and pocketing the difference. MEV more generally stands for maximal extractable value and refers to a validator's ability to take payment for deciding how to organize transactions within a block. Sandwich attacks have been a contentious issue in both the Ethereum and Solana ecosystems. After sandwich bots ran rampant in 2021, Ethereum infrastructure providers codified a system to control and distribute MEV on the network. The justification was that MEV is impossible to remove entirely, so the best solution is to create

rules that determine how the extracted value is distributed. Salana took a slightly different approach, refusing to acknowledge that MEV is an unsolvable problem. Earlier this year, as meme coin activity took off, MEV extraction also hit incredible levels. This led Gito Labs to shut off the mempool feature in their client, ensuring that user transactions are no longer visible and therefore open to MEV exploits. Unlike Ethereum, Solana doesn't have a native mempool. Instead, transactions are routed directly to validators for inclusion in a block. This means that that sandwich attacks are only made possible by using modified validator software. Gito frame this move is being in the best interest of users, even though it reduced a revenue stream for validators.

This week's removal of validators from the delegation program highlights that Gito's solution didn't solve MEV, it simply forced it underground. One source speaking to the controversy said that many of the operators that had been removed were based in Russia. Over recent months, there have been some whispers of some validators operating private mempools and profiting to the tune of hundreds of thousands of dollars by facilitating sandwich attacks. The validators can continue to process Salana blocks, they will just no longer receive subsidies from the Salana Foundation to do so. That is a big deal, as Salana validators are expensive to operate, with some suggesting annual costs around $65,000. The removal of validators has reinvigorated the discussion around dealing

with MEV on blockchain networks. MertMumt has the CEO of Solana RPC provider Helius set out his vision of how the problem should be dealt with, tweeting, we can see if you sandwich and you're free to do so, but if you do, don't expect retail to stake with you while you also take their money. And in this case, the profit isn't even shared with the network. There are some RPC providers who spam the hell out of the network, which makes the problem much worse than it should be and then brag about landing rates. Helius RPCs do not do this. Now, the attacks from the Ethereum side of the industry were obvious and many. As one example, JZ Pratt Delzine, Abilda tweeted, Solana Foundation has removed some validators from validating Salana. This is ridiculous. Permissionless

decentralized, what a joke. Salana solved MEV. They're just liars and grifters. Mert was not having it firing back. Salana did this MEV thing all wrong. Instead of simply not subsidizing validators that rob retail, they should have declared sandwiching a core part of the network and then literally call the feds if someone unbundles a sandwich transaction. Wait, hold up. Now that referred to the Ethereum solution of standardizing MEV extraction using flashbots, as well as the recent criminal charges brought against a counter-MEV extractor. So why the hell are we covering this on the breakdown, which doesn't get this technical normally? What makes this a little bit more interesting is that it's a public discussion of how a negative externality of blockchain system

should be approached. Ethereum seems to have decided that MEV is inevitable and therefore should be accepted, captured, and redistributed to network participants. That approach doesn't make it go away. Retail Ethereum users still get sandwiched every day to the point that the leading MEVBot has the largest gas spender on the network. This is justified by treating the bribes paid by MEVBOTs as revenue that is redistributed to stakers, but that does very little to reduce the harm to regular users. The Salana approach is presented as an enforcement. This week's removal of validators is one of the largest examples of social slashing, removing the stake of bad actors for something other than violating consensus rules.

The goal is to minimize MEP as much as possible, but that would require some concessions on decentralization and the clarity of rules. In other words, this seems to be something with no obvious solution only tradeoffs. The industry is currently having a very loud argument on how this issue should be dealt with, and to the extent that you are invested, literally or metaphorically, in the future of these networks, it's worth paying some attention to. Speaking of attacks, we move now to Uniswap Labs, which have hired a new chief legal officer as the company hunkers down to prepare to fight the SEC. The new hire is Catherine Minarek, who was previously the vice president of legal and deputy general counsel at Coinbase. Outgoing is Marvin Amori,

who has been with Uniswap since the beginning. Amori said he made the decision to step down in order to prioritize spending time with his young family and plans to continue working on Defi policy. He praised Minerick stating that she, quote, has been the key architect of Coinbase's litigation strategy working for the fearless Paul Griswell. I recruited her and trust her with taking over the legal reins for an amazing company that I love, and with accelerating a technology that the world needs. Minerick commented on the new role, tweeting, It is impossible to spend time in crypto and not be inspired by the potential of Defi to change

the world. So I am humbled to be taking on this new role at Uniswap Labs, continuing another part of the fight for economic inclusion and the future of finance for all of us. Keep in mind, many are taking this as a transition to wartime personnel for Uniswap Labs. The company received a well's notice from the SEC in April, which claimed that the platform is an unregistered securities exchange and that the Uniswap token is an unregistered security. Uniswap Labs have signaled that they are ready to fight this matter to its conclusion in court. Uniswap Labs founder Hayden Adams referred to this as one of the most important legal fights for

DeFi, and it's difficult to argue. Finally, one more interesting situation that we haven't had a chance to cover, which I've been keeping one eye on, Bitcoin miner BitFarms is looking to frustrate takeover attempts with new poison pill shareholder rights. In April, Riot Platforms made an unsolicited bid to purchase BitFarms, which was rebuffed by the board. BitFarms is currently undergoing an executive restructuring firing their CEO. Riot took the upheaval as an opportunity to push a takeover plan, purchasing more than 12% of BitFarm stock, and calling for a shareholders meeting to appoint, quote, well-qualified and independent directors. The BitFarm's board has rejected buyout

saying that they significantly undervalue the company. BitFarms has said they were in the midst of a strategic alternatives review process, with these alternatives including selling the company or continuing to work towards their existing business plan. BitFarms claims that Riot has declined to participate in the process, stating that it was an attempt to undermine the company and thwart the interest of third parties. In a Monday press release, BitFarms announced that they had put in place a shareholder rights plan to, quote, preserve the integrity of the board's process. The plan purports to attach a right of repurchase to each unit of common stock issued after June 20th. The rights would kick in for shareholders who own 15% of the company, making the plan very narrowly targeted at preventing

a hustle takeover. BitFarms claim the plan was intended to, quote, ensure to the extent possible that the board has sufficient opportunity to identify, develop, and negotiate alternatives. If shareholders don't ratify the plan within six months, it would be nullified. Prior to this new twist, Peter Stoneberg, managing director at crypto advisory firm architect partners, said BitFarms was, quote, doing everything right to put up a strong defense to riot's bid. In other words, friends, Bitcoin mining continues to be a rough and tumble industry. I'll keep you posted as that develops, but 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.