The Breakdown - More Crypto Regulation Is Likely Coming, but Bans Are Not

Episode Date: June 2, 2021

Today’s episode includes a quick update on Marathon’s bitcoin mining about-face. Our main discussion focuses on the changing shape of crypto regulatory discussion in the U.S. While more regulation appears to be on the horizon, that regulation likely reduces the chance of more extreme actions.  -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- 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 produced and distributed by CoinDesk.com

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 nexus.io and produced and distributed by CoinDes. What's going on, guys? It is Tuesday, June 1st. Welcome to Summer. And today we are revisiting one of the fuds that has been with us throughout this year, the idea that governments will ban Bitcoin. And we're going to read some tea leaves from the U.S. to see how that might be playing out here. Before that, though, I'm not going to do a full brief, but I did have one quick update that I wanted to share. Some number of weeks ago now,

Marathon aroused the ire of the Bitcoin community with their announcement of something they called OFAC compliant Bitcoin mining. OFAC is the Office of Foreign Assets Control. These are the folks that blacklist specific bank accounts from U.S.-led global payment rails. They have also blacklisted certain Bitcoin and crypto addresses known to them to be nefarious action. Stable coins like Tether and USDC often comply with OFAC blacklists. Marathon took it to another level, however, with their notion of censoring certain transactions at a protocol level by not processing transactions from those sanctioned addresses. It's not hard to see how this threatens the censorship resistance that is one of the central

attributes of Bitcoin. At the time of this announcement, they said, quote, by excluding transactions between nefarious actors, we can provide investors and regulators with the peace of mind that the Bitcoin we produce is clean, ethical, and compliant with regulatory standards. Keep in mind, there were no regulatory standards for this. They were going above and beyond, if you want to call it that. Bitcoiners were worried about the balkanization and fracture of Bitcoin into clean Bitcoins and non-clean Bitcoins. And this conversation was triggered again last week in discussions around the Bitcoin Mining Council, the Michael Saylor Elon Musk-led group of North American miners, talking about energy disclosures and promoting cleaner energy mixes for mining.

One of the concerns people immediately had when they learned of the Bitcoin Mining Council was this notion of some Bitcoin having cleaner provenance than others undermining fungibility, the idea that any one Bitcoin can be exchanged for any other Bitcoin. The fact that Marathon was involved with the Mining Council was one of the things that made it deeply concerning. They had already shown willingness to threaten a fundamental property of Bitcoin, so why not go even farther in the context of greening Bitcoin? Marathon further pissed off Bitcoiners by recently not signaling for,

the taproot upgrade. However, apparently there is something going on internally because now they've walked this all back. Fred Teal, Marathon's CEO for the past month or so, has now said, quote, Marathon is committed to the core tenets of the Bitcoin community, including decentralization, inclusion, and no censorship. In other words, it will validate transactions on the blockchain quote in the exact same way as all other miners who use the standard node. He also said they will signal in favor of the new taproot upgrade, which is focused on improvements around privacy, scalability, and more. Quote, we look forward to continue being a collaborative and supportive member of the Bitcoin community and to realizing the vision of Bitcoin is the first decentralized

peer-to-peer payment network that is powered by its users rather than a central authority or middleman. The point? Keep up the pressure on companies when they're behaving in a way that is out of line with Bitcoin's fundamental values because that pressure can work. But with that, let's shift to our main conversation. This year has seen a nearly nonstop barrage of FUD. Part of this is normal. Bull markets always have to climb what is called a wall of worry, some concern that threatens to derail the thing before it really takes hold. But then again, Bitcoin is not a normal industry and this was not a normal set of fud. First, we had Tetherfud. The idea that Tether was was backed by nothing or worse was actually manipulated to raise the price of crypto.

Then the New York Attorney General settled with Tether, a settlement that didn't require them to admit wrongdoing and which made no accusations of market manipulation. Now, to be clear, TetherFud didn't go away. People have expressed recently serious concerns about the portion of Tether's reserves that are in the form of short-term debt called commercial paper from undisclosed companies. There is also a broader question of stable coins in the U.S. regulatory regime that we'll get into. But the point is that the New York Attorney General Settlement significantly defanged this particular fear, uncertainty, and doubt. Then, of course, there have been environmental concerns, and it's worth taking a moment here to

distinguish between legitimate concerns and FUD. When I say FUD, I'm referring to bad faith critique, from people who are fundamentally opposed to an asset like Bitcoin in such a way that no amount of disproving evidence or narrative reframing will sway them. When it comes to energy, there are plenty of people who haven't spent that much time learning about Bitcoin and proof of work, and just hear the headline popping statistics, leading them to have questions. Those are the folks that people like Nick Carter write articles for. Energy Fudd, on the other hand, refers to folks who are deliberately repeating the most sensational versions of the argument. So when people refer to Elon's Bitcoin Energy arguments as FUD, they're showing an inherent belief that, one, there is no way he didn't know about

this before he made the big Bitcoin purchase for Tesla, and two, that it feels like there is behind-the-scenes pressure that we're not exposed to that is causing him to repeat Bitcoin opponent talking points. Anyway, Energy FUD has clearly been a key part of this bull cycle as well. But there has been another category lurking, and that is the government will ban at FUD. Ray Dalio has been one of the biggest articulators of this particular FUD since last year, all the way to now, even though he said he owns some Bitcoin. His argument is that if crypto gets too successful, governments will try to ban it. And to be fair, banning arguments have had a bit of evidence this year. India appeared moving swiftly in the direction of a serious ban that would be

inclusive of even holding crypto. Now, this is obviously terrible for those in India, but it wasn't something that had the force to move global markets. China, however, did. We spent much of the last two weeks reeling from and trying to understand the next steps in a potential ban discussed by the vice premiere himself. I've done numerous episodes on this, but what made it different is that local market participants, particularly miners, seem to be taking the threat seriously. Now, even if there are some reasons that a China mining ban could be good for Bitcoin as a whole, particularly around hash rate decentralization if miners did leave China, it also added some amount of heft to the government banning narrative in general. However, there's an interesting narrative

counter happening at least in the West. In short, this is that regulations, but not bannings, are coming to crypto. Looking for the best way to unlock your crypto's liquidity, nexo.io is exactly what you need. Borrow against your digital assets at just 6.9% APR, earn passive income with yields of up to 12%, and swap between more than 100 market pairs with the instant nexo exchange. Try the nexo wallet app to get the whole 360 degrees of crypto banking. Get started at nexo.io. That's nexo.io to get started today. Let's look at some examples of this.

The Financial Times weekend edition cover story was called U.S. regulators signal bigger role in cryptocurrencies market. F.T. interviewed the new director of the office of the comptroller of the currency, Michael Sue. This is the person who replaced Brian Brooks, who was Coinbase's former lawyer and who used his short time at the OCC to open up a number of doors, particularly with regard to how traditional financial institutions can work with crypto and crypto companies. In his brief time in office, Michael Sue has ordered a review.

view of all of those policies. He's also been big on getting different agencies together to create what he's called a regulatory perimeter for cryptocurrencies. Quote, it really comes down to coordinating across the agencies. Just in talking to some of my peers, there is interest in coordinating a lot more of these things. So how is this manifesting? Well, part of it is that they put together an interagency team they called the Sprint team involving officials from the Office of the Comptroller of the currency, the Federal Reserve, and the FDIC. Sue said that the focus of the sprint team, was not policy-making but just putting ideas in front of other agencies to consider. Quote, it's small and it's senior.

The idea is that time is of the essence, and if it gets too big, that gets harder. Sue also has made explicit comparisons to the lead-up to the great financial crisis. From the FT, the danger is that new and improved techniques give rise to a large and less-regulated shadow banking system. Today, fintechs and technology platforms are devising payment processing tools that bring great promise, he said, but also risks. quote, for me, it's hard not to feel some deja vu, Sue told legislators. Now, one of the things that I think is notable about this is that Sue is not alone in being a

great financial crisis era regulator. Gary Gensler, the head of the SEC, was involved in the cleanup, then as the head of the CFTC. So these are folks whose perspective, for better or worse, was intimately shaped by that context. And these statements from Sue weren't the only thing feeding this feeling of crypto-regulatory action in the U.S. brewing. We saw Gary Gensler discussing enforcement actions last week. The Treasury Department's tax plan included an entire section on crypto, one that suggested that exchanges that receive over 10K in a single transaction should report it to the IRS. The FDIC also published a formal request for information about how banks are using digital assets and what the federal regulator could do to assist them. So the question is, if more

regulation is coming, are we going to see pro-innovation guardrails or are we going to see overburdensome controls that stifle the things that crypto does differently in a fundamental way. Market analyst Jim Bianco is nervous. Quote, my worst fear, regulators are afraid they will be irrelevant and will set out to destroy innovation and improvement to keep themselves relevant, all the while claiming they are protecting the public. In my conversations with current and former central bankers, they have stated that their relevancy is an important part of determining crypto regulation. They are all in favor of progress as long as they are at the center of it. Bianco then makes a football analogy,

and basically asks if they're a quarterback who understood their job was to train their replacement, or are they a quarterback who's willing to destroy the team to punish them for drafting the replacement? He fears that they're the destroyer, not the trainer. Avanti Banks' Caitlin Long is a lot more positive. She had a long thread from May 20th, actually, even before some of these most recent actions happened, that I think paints the other side of the argument. Quote, it's clear a U.S. crypto-regulatory crackdown is starting, But I'm optimistic because most of the major players and agencies have spoken already, and the policy

is taking shape. It's pay taxes, comply with laws, and don't take shortcuts, and will enable the innovation. It's not a Bitcoin ban. She then goes through about a dozen days' worth of news, all of which we've covered on this show, and says, quote, spot the pattern, news almost every day, theme compliance. It's pay taxes, comply with laws, and don't take shortcuts. Not a ban. Now, one comment I've seen many people state some version of on crypto Twitter is something like,

but crypto is already regulated. I think there are a couple responses to that. First of all, yes, you're right. There are plenty of rules that crypto needs to play by that are already in place. And I share the concern that Bianco has that regulators try to insert themselves in regulation to sustain their own relevancy over time. However, there is nothing within government purview that is not constantly evolving in terms of how it is regulated. So to some extent, we should expect constant changes, certainly at least every time parties switch power.

Third, what Brian Brooks' time at the OCC showed is how many dimensions of crypto regulation there really are, and how many of them still have unclear or open policy or regulatory implications. In other words, the fact that Brooks was able to change so much in terms of how institutions were able to interact with crypto, validates how many interactions between crypto and traditional finance remain to be determined. Fourth, there is a lurking X-factor that I believe has to do with stable coins and central bank digital currencies. Eric Balcunis, who covers ETFs for Bloomberg, kind of intimated this in a tweet. Writing about Bitcoin ETF applications piling up and getting dust on Gary Gensler's desk, Balcunis tweets, quote,

everyone focused on what the SEC says out loud, underlying markets, blah, blah, which is understandable. But I'm starting to give more plausibility to the theory that the real reason is the U.S. government sees crypto as a threat. which of course they can't say out loud. Because the SEC has eyes, internet access, and a Bloomberg terminal so they can clearly see that the underlying markets allow for fine ETFR being in Canada, Europe, and now Brazil, which use the same exchanges we would. I just have a spiky sense that there's something else going on. Back to NLW now, I kind of wonder how much that has to do with stable coins. There was also an op-ed in Bloomberg from another former CFTC chairman Timothy

Mossad talking about Tether and how he supported last year's Stable Act, which would have stable coin issuers basically be regulated just like banks, among other implications. For my part, I think that the biggest regulatory questions faced in the next year or two will not be about Bitcoin. They'll be about stable coins. And the threat they potentially represent to the U.S. digital dollar. Now, that does not mean it's a foregone conclusion that stable coins will be shut down or forced to change. Many of these stable coin issuers are clearly positioning themselves for public-private partnerships with the government around a digital dollar. But along the way, there's going to be many many, many questions about how these companies interact, what powers they have, what responsibilities

they have, and how it all fits in a larger regulatory regime. As I said, we're still in the tea leave stage, but there are clearly winds starting to blow here. But as we wrap up, let's return to Caitlin Long's point about regulation, not banning. While many, including myself, aren't thrilled about the prospect of more regulation, there is a dimension of fud killing from it. The volume on the banning narrative gets turned down significantly in a world where regulators, have wrapped their heads around Bitcoin and crypto and don't feel threatened. That doesn't mean we shouldn't combat regulation. It means that there is at least some amount of silver lining.

And if you want some evidence about how much better regulation versus banning is in real life, look to India. The Reserve Bank of India sent out a clarification yesterday that commercial banks cannot use its April 2018 crypto banking ban as justification to deny customers who interact with digital assets banking services. The Supreme Court of India struck that down in March of 2020, and so banks cannot use that as justification. Many in the Indian crypto community are taking this as one more indication

that the India crypto ban may not, in fact, be a ban, but a regulatory overhaul that provides clear guidance on how citizens can participate. Looking at the reaction of Indian crypto Twitter, that is a welcome difference. Anyways, guys, a lot more to watch here, but for now, I appreciate you listening. I hope you had a great holiday weekend. Until tomorrow, be safe and take care of each other. Peace.