The Breakdown - One of Crypto's Biggest Congressional Allies Won't Seek Re-Election

Episode Date: December 7, 2023

House Financial Services Committee Chairman Patrick McHenry, who has been instrumental in advancing crypto legislation, has decided he won't seek re-election next year. NLW discusses what's happening and what it means for crypto. Today's Sponsor: Kraken Kraken: See what crypto can be - https://kraken.com/TheBreakdown 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 Wednesday, December 6th, and today we are talking about one of Crypto's biggest allies in Congress leaving Congress. 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. Well, as I said, today we are talking about the loss of one of Crypto's biggest allies in Washington, but before that, of course, we got to check in on the price.

At the time of recording, Bitcoin is just under $44,000, and excitement is definitely settling in. CME futures approached all-time high in open interest, currently sitting at $5.2 billion, which is just $200 million shy of the October 2021 all-time high. They've seen a 43% rise in open interest over the past 30 days. Now, a lot of the chatter online has continued to emphasize the fact that this is happening without retail showing up. Mike Alfred wrote,

We're at $44,000 Bitcoin and the retail crowd is eerily quiet. They must be too busy with their kids, day jobs, and Instagrams. Not a single inbound text from a no-coiner friend this week so far. The coast is clear. So freaking bullish. Even disgraced former hedge fund manager Zuzu, who is apparently out of jail, jumped in to say, run it back turbo. But with that, let's talk about slightly more substantive things. Representative Patrick McHenry

has announced that he will not be standing for re-election and plans to retire from Congress at the end of his term. It goes without saying, especially if you are a regular breakdown listener, that McHenry has been a key congressional ally for the crypto industry. He's advocated for reasonable legislation and holding aggressive regulatory agencies to account. McHenry wrote in a press release, this is not a decision I come too lightly. But I believe there is a season for everything, and for me, this season has come to an end. Now, McHenry's retirement came as a significant shock to Republican colleagues, particularly considering that he was just a moment ago, the acting speaker of the House, and that he had recently announced his intention to seek re-election. Now, during his time as

ranking Republican member and then chairman of the House Financial Services Committee, McHenry has been the driving force behind multiple pieces of crypto legislation. He led efforts to negotiate the contours of stablecoin regulations with his Democrat counterpart and insisted on pushing forward with comprehensive market structure legislation. Under McHenry's leadership, Congress made significant progress towards appropriately regulating the crypto industry. Alas, McHenry leaves with a lot of work left to be done on that front, with efforts currently centered on bringing crypto legislation to a vote early next year prior to his departure. Outside of crypto policy, McHenry served as a core member of Republican leadership. After first being elected in 2004, he rose through the ranks to become a pivotal

figure within the GOP. McHenry was a key lieutenant of former House Speaker Kevin McCarthy, who was ousted in October alongside the vision between conservative Republicans and the more populous faction, the Freedom Caucus. McHenry spoke to fractures forming in the GOP and Congress in general in his press release writing, there has been a great deal of hand-wringing and ink spilled about the future of this institution because some, like me, have decided to leave. Those concerns are exaggerated. I've seen a lot of change over 20 years. I truly feel this institution is on the verge of the next great turn. Whether it's 1974, 1994, or 2010, we've seen the House evolve over time. Now, for those those who aren't familiar, those dates refer to previous major shifts in Republican leadership and

political alignment. Evolutions McHenry continued are often lumpy and disjointed, but at each stage, new leaders emerge. There are many smart and capable members who remain and others are on their way. I'm confident the House is in good hands. With McHenry's retirement now set for January 2025, the crypto industry will need to find other willing members of Congress to work with. House Republicans Tom Emmer and French Hill will likely continue to champion the need for responsible crypto legislation, while House Democrats, Richie Torres and Josh Gottheimer have become increasingly bold in their defiance of party leadership to advocate for the passing of common-sense regulation. Still, it is undeniable that McHenry's departure leaves a massive void in the

crypto-friendly wing of Congress. What's more, it's entirely unclear that the transition currently underway in the Republican Party will yield a new leadership team willing to deal with the industry on friendly terms. Crypto industry figures contributed to an outpouring of gratitude for McHenry's work on Capitol Hill. Sheila Warren, the CEO of the Crypto Council for Innovation, said, we have appreciated McHenry's approach to coalition building, willingness to work in a bipartisan nature and constructive engagement with the industry. He will be noticeably missed in Congress. Blockchain Association CEO Kristen Smith said, Chairman McHenry is a stalwart champion of innovation in the digital asset industry, his bipartisan approach to common sense rules that improve

the status quo and ensure that this technology develops on American soil is a prudent model for Congress as it considers future crypto-specific legislation. While we're sad to see such an industry champion leave the House, were pleased to be able to work closely with the congressman for another 13 months. Now, just to get a sense of how deep the divisions in the GOPR right now, former Trump manager Steve Bannon took a victory lap on his show stating that, Patrick McHenry is retiring because of his audience. He cut the worst deal in the history of Congress to allow Biden to spend 14 to 15 trillion and run unlimited deficits. McHenry was lead negotiator. He's out. Ladies and gentlemen, that's a scalp. This is obviously not a politics show. But if you've been paying attention

this year, it's very hard to deny that the internal divisions within the GOP have been a major factor in how crypto legislation has, or more accurately, has not, come to pass. Which is, of course, to say nothing of the D's on the other side of the aisle. They just happen to not be in the focus of this show. Now, earlier on Tuesday, the House Financial Services Subcommittee on Digital Assets, Financial Technology, and Inclusion held a hearing to discuss regulators' interactions with financial technology. Senior officials from the SEC, the OCC, the FDIC, and the Federal Reserve gave testimony. Crypto was one of many topics with the SEC coming under particular scrutiny in that regard. The SEC's representative was Valerie Sapanek, director of the Strategic Hub for Innovation in Financial Technology, aka FinHub.

That division is tasked with coordinating the agency's oversight and response to emerging technologies, as well as serving as a public engagement resource. Patrick McHenry questioned the work of FinHub in similar offices across multiple agencies. He said, I'm increasingly concerned that those offices are not operating as intended. It's critical that firms and entrepreneurs can go to market with innovative products sooner while maintaining important consumer protections. These offices should not be used to smother innovation in technology or simply ignore it.

It's clear the administration cannot continue to only regulate by enforcement. Democrat ranking member Maxine Waters called for a group of lawmakers to take a closer look at the firms operating within the crypto industry. She said, I would like to try and organize small groups of Congress to be able to ask more questions and get more involved in what is really going on with some of these companies. Water suggested that assistance in this task could be provided by the SEC. Water said to Sapanek, I'm going to ask what could be a sensitive question,

but I'd hope you would try and help me out with this. These crypto companies are coming to Congress and to members of Congress. Some members of Congress are truly interested in the role that crypto is going to play in the world, and particularly in the United States. Waters then asked that the SEC could facilitate, quote, special sessions with members of Congress to talk about the problems and the pitfalls that may occur and give some information that would help them not to believe that somehow they should be advancing or even advocating because maybe they just don't know enough.

Sepanic said the SEC is happy to provide technical assistance to lawmakers, and Waters rounded out her time by asking whether the SEC was aware of crypto companies making, quote, huge contributions to members of Congress. Today's episode is brought to you by Cracken. For far too long, the whole financial system has been standing still, too slow, only on for certain hours. overly designed for some types of people, but not for others. Crypto, at its best, represents progress. It asks the question, what if?

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Learn more at crackin.com slash the breakdown. Disclaimer, not investment advice. Crypto trading involves risk of loss. Cryptocurrency services are provided to U.S. and U.S. territory customers by Payward Ventures Inc. PVI, BVI, DBA, Cracken. Meanwhile, Tom Emmer asked about the infamous Hinman speech. This was a 2018 address given by then SEC Director of Corporation Finance, Bill Hinman. In it, Hinman laid out the concept of sufficient decentralization.

the idea that a crypto token could translate from being subject to securities laws to being considered a commodity by distributing control and ownership of the network. During the speech, Hinman had specifically mentioned Ethereum as an example where token sales should no longer be considered securities transactions due to sufficient decentralization. Emmer took Sapannock to task for her comments on a draft of the speech. Zapanek had suggested that Hinman should, quote, provide less detail because the concept of a token morphing from a security to a non-security was a new concept and would generate a lot of discussion. Emmer said, when the industry complains about a lack of clarity, I see that it was a deliberate policy preference. His point was that the SEC had issued basically zero guidance since that speech.

Coming to a close, Emmer said that the SEC, quote, is not adhering to the law, and that's why it keeps losing in court. He alleged that the SEC is advancing Gary Gensler's personal agenda rather than carrying out its congressionally mandated function. Reinforcing this point, Emmer took to X and said, If it wasn't obvious before, it's certainly obvious now. The SEC has a deliberate policy preference to providing less clarity to the marketplace instead of more clarity. Complete disservice to our great capital markets. Now, even among hearings that are meandering and aimless and don't really have a point, this hearing was meandering and aimless and didn't have a point.

Even people whose perspective I agree with and like were off on their own tangents completely based on whatever it is that they wanted a sound bite around. This is, of course, very sad in the context of an environment in which making any sort of substantive progress towards meaningful legislation around these issues would be very, very welcome. But it's also highly reflective of the state of government, so what are you going to do? Now, speaking of crypto and the government, the crypto industry is apparently on pace to spend a record amount on lobbying this year. According to a report from Reuters, crypto companies have spent almost 19 million across the first three quarters of the year. 16 million was spent in the

same period last year, with the total annual spend rounding out to 22 million. Now, this record spending for the industry comes despite the absence of FTX, which was a top 10 spender last year. This suggests other firms have stepped up their lobbying budgets to compensate. Coinbase was the top funder of lobbying effort spending $2.16 million, with the next three biggest spenders being crypto.com, the blockchain association, and finance. Now, the implication of the article was that the crypto lobby is making an aggressive push into Washington with a well-funded lobbying campaign aimed at passing industry-friendly legislation. Blockchain Association's CEO Kristen Smith pushed back on this angle, saying that her organization's goal, quote, is to engage directly with policymakers, build relationships, and bridge the

education gap to build a common sense regulatory framework. And in case you were thinking that people weren't still angry at crypto on Twitter, many anti-crypto commentators on the platform pushed the absurd idea that the crypto industry was the top spender across all industries this year. According to data from Open Secrets, however, that couldn't be further from the truth. Just as a for example, the crypto lobby's $19 million budget this year was dwarfed by other industries. The defense industry has spent almost $100 million on lobbying this year, while the insurance industry spent 120 million. Indeed, the crypto lobby's budget is more comparable to the Indian casino, telecommunications, and sea transport industries. Even within the securities and investment sector,

the crypto lobby is a relatively small player. The broader sector has spent over 100 million so far this year, making crypto less than 20% of the sector's lobbying spent. Now, one can have not-so-glowing feelings about lobbying, and I certainly wouldn't fault you for that. But unfortunately, it is also just the way things work in Washington, D.C. Having a lobbying presence as an industry, In other words, doesn't mean that you're some twisty mustache trying to buy off the government kind of SBF figure. What it means is that you're playing the game on the gross terms of the game. Now, as we round out, just a little bit more follow-up on the recent finance settlement.

CFTC Commissioner Kristen Johnson discussed the paradigm shifting settlement and a conference appearance on Tuesday. She said the penalties were, quote, heightened due to a number of prior warnings issued by the regulator. According to Johnson, the CFTC had been, quote, on record and publicly saying, if you come to U.S. markets and operate, inviting U.S. customers to participate, you have to comply. Johnson was careful to clarify that the CFTC had not sued Binance for misconduct, but rather because it had simply failed to comply with regulation. She said, there's a common assumption that

enforcement actions in the crypto or digital asset ecosystems can note bad actors or bad conduct. Admittedly, there is plenty of evidence to support this assumption. In Binance's case, however, Johnson added, the matter and the resolution of the litigation did not involve any allegation of fraud or similar misconduct. Now, as part of last month's $4.3 billion settlement with U.S. government agencies, finance agreed to pay a $1.35 billion civil penalty to the CFTC and a further $1.35 in disgorgement of profits. In addition to his agreement to step down as CEO, CZ agreed to pay a $150 million fine to the regulator. Johnson pressed home the idea that the CFTC would be an open, engaged regulator for law-abiding crypto firms, stating, we are excited for market participants,

but it's critical that if you operate in our markets, you are complying with regulation. Her hope was that the past few years have been the growing pains of a new industry, and that, quote, what we will see going forward is that these early cases will really be a bit of a cautionary tale for those firms that really do want to successfully operate in this ecosystem. Now, over on Binance itself, newly appointed Binance CEO Richard Tang appeared evasive during his first live interview as the head of the largest crypto exchange in the world. Tang appeared at a Financial Times conference in London on Tuesday via video. The questioning from the moderator attempted to drill down into the detail surrounding a new,

theoretically more transparent and compliant finance. As the interview dragged on, however, the moderator got increasingly frustrated and said, I've asked you where Binance's global headquarters is, I've asked you whether Binance is going to undergo an audit, how many employees the company currently has on its books, and whether you're applying for a license in the UK, which is what Binance told us during our last FT Crypto Conference. You haven't answered those questions. Tang also appearing to lose patience, responded, I have answered each and every one of those questions. When the moderator followed up again by asking where Binance's headquarters was located, Tang answered, it is under consideration. Now, throughout the interview, Tang was far more comfortable

with broad concepts of reform rather than key details. He said that, quote, a lot of things will change under his leadership. He also acknowledged that mistakes were made and that Binance's compliance department was inadequate for its size. I don't know, man, it was a weird interview, and if anything suggests to me that despite this settlement, Binance has not answered all the questions that people have about them. But whether that's just a divide between the people who are in this industry and the people outside of it remains to be seen. However, for now, that is going to do it for today's episode. Big thanks one more time for today's sponsor, Cracken. Go to Cracken.com slash the breakdown and see what crypto can be. Until next time, be safe and take care of each other.

Peace.