The Breakdown - Post-FTX, India and Europe Push Ahead With CBDCs

Starting point is 00:00:00 Now, I think this speaks to the fact that the CBDC debate is set to really heat up this year. You can feel everyone getting geared up for it, and I think it's important. It's been a few years in the making, but it feels finally like it's the conversation that's actually going to be had. 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 Nexor.io, Circle, and Cracken, and produced in distributed by CoinDesk. What's going on, guys? It is Wednesday, November 30th, the end of just about the weirdest month of my life. And today, we're talking a global regulatory roundup.

Starting point is 00:00:43 Before we get into 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. So as I mentioned today, we're going to look at global crypto regulatory reactions. Now, you may be thinking, wait a second, but isn't there a big Jerome Powell presser? And isn't Sam showing up to a New York Times summit, albeit virtually? And the answer is yes, but those things are happening after the time of recording. So we'll have to dig into them tomorrow. In the meantime, however, there are reverberations from the FTX collapse, basically all around the world, with every government taking.

Starting point is 00:01:25 a new and frankly different look at how to regulate and how fast to regulate. Case in point comes from Brazil. Last night, Aaron Stanley, the founder of the Brazil Crypto Report, posted on LinkedIn, big news out of Brazil tonight as Congress has approved legislation that would create a comprehensive regulatory framework for cryptocurrency exchanges and businesses in the country. The bill has been seven years in the works, passing the Chamber of Deputies last December and the Senate in April before stalling in the chamber over the summer as election season stifled its momentum. Its prospects of passing in Congress's lame duck session looked grim

Starting point is 00:01:59 until the collapse of FTX provided the necessary kindling to get the legislation over the finish line. While far from perfect, this legislation creates a regulatory framework that will enhance the legitimacy and credibility of the burgeoning Brazil crypto ecosystem. So what did the bill that actually passed? Well, this bill will establish a virtual service provider license, which will be required for crypto firms and exchanges. It will also create a new crime of fraud involving versions. It will also create a new crime of fraud involving virtual assets, which carries a penalty of up to six years imprisonment and significant fines. The text of the bill stipulates that crypto assets that are considered securities will be regulated by the Brazilian Securities and Exchange Commission, and other assets not falling into that category,

Starting point is 00:02:37 will be regulated by another body to be appointed by the executive branch, most likely the central bank. The bill explicitly allows Bitcoin to be used as a method of payment and will enable regulators to make rules about the conduct of crypto firms. Amendments to the bill that were rejected to ensure the bill could be passed included a tax break for crypto miners utilizing renewable energy, as well as a requirement to segregate customer assets from crypto-firm balance sheet assets. Currently, Brazil ranks seventh in Chainalysis's Global Crypto Adoption Index, seeing 142.7 billion in crypto trading between July 21 and June 2022, which was the most in South America. Bitcoin Magazine tweets the bill recognizes cryptocurrencies

Starting point is 00:03:15 as digital representations of value that can be used as a means of payment and as an investment asset in the South American nation. Now, moving over to Europe, the European Central Bank published a scathing blog post called Bitcoin's Last Stand. They tweeted this morning, the apparent stabilization of Bitcoin's value is likely to be an artificially induced last gasp before the crypto asset embarks on a road to irrelevance. The ECB blog looks at where Bitcoin stands amid widespread volatility in the crypto markets. So yes, if you are wondering, we are in the Bitcoin is Dead phase of all of this. So what are the points this blog makes? Well, one, they say Bitcoin is rarely used for legal transactions.

Starting point is 00:03:55 The piece basically argues that all of Bitcoin's value is speculative. Number two, they say regulation can be misunderstood as approval. The big argument here is that innovation protection should not be the priority of regulation, and that blockchain's results and use cases aren't all that innovative anyway. They also drop the old peach of environmental critique in this section, saying, it's also worth noting that the Bitcoin system is an unprecedented polluter. First, it consumes energy on the scale of entire economies. Bitcoin mining is estimated to consume electricity per year comparable to Austria. Then number three, their last bullet is promoting Bitcoin

Starting point is 00:04:28 bears a reputational risk for banks. They write, the financial industry should be wary of the long-term damage of promoting Bitcoin investments. The negative impact on customer relations and the reputational damage to the entire industry could be enormous once Bitcoin investors will have made further losses. Now, I address this only because it is all over crypto Twitter this morning, but look, this has the force of brand because it's on the ECB blog, but let's not get it twisted. This is not some comprehensive report. It's a friggin' blog post. The ECB even disclaims it at the end, saying it appeared as an op-ed first in a German business newspaper. It's also sputtering and doesn't actually have an argument. It's just a list of grievances which now feel acceptable

Starting point is 00:05:06 to air because everyone is down on the crypto industry. Anyway, this does not rank high on my list of things that are worth worrying about, and I laughed when lawyer Preston Byrne retweeted it with the quote, Loll, who are these guys kidding? Bitcoin is going to deliver the eulogy at the Euro's funeral in 10 years. Now, more significantly taking place in Europe right now is an EU parliamentary hearing on the FTX collapse. The hearing is ongoing, so we only have snippets of people who are live tweeting the

Starting point is 00:05:32 live stream. A couple of those quotes. The EU parliament's Mika lead, Dr. Stefan Berger, says, FTX is not the failure of blockchain technology, but the failure and hubris of one person. Here, here. This was repeated by Alibald. Alexandra Georges Schroeder, the deputy director of DG Fismah, who said,

Starting point is 00:05:49 we don't see FtX as a failure of crypto or blockchain per se, but as many failures of governance controls, etc. No company regulated under MECA, would be allowed to be organized this way. Stefan Kern, the head of risk analysis and economics at ESMA, says, we currently see no significant risk of financial spillover into the wider financial sector. Interlickages are comparatively limited in the sector overall still comparatively small. So basically what you're seeing is that the folks who have been involved in creating European crypto regulation are making two clear points. One, this is a SAM problem, not a crypto problem, and two, with the right regulation, it would be much harder for there to be SAM problems. Anyway, I'm sure

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Starting point is 00:08:50 and to the effect that FTCS shows that we do not need to do so. Cunleaf said that FTCS in particular, quote, is emblematic of these new technologies and the possibility that they might revolutionize financial services in the forms that money takes. He goes on, Our approaches regulators should be open, by which I mean we should be prepared to explore weather,

Starting point is 00:09:07 and if so, how the necessary level of assurance equal to that and conventional finance could be attained. But we should also be firm that where it cannot, we are not prepared to see innovation at the cost of higher risk. Well, this week, more activity on the CBDC front, as France and Luxembourg have used an experimental CBDC to settle a bond worth $100 million in the latest of a series of trials in tokenized financial markets. The General Director of Financial Stability and Operations at the French Central Bank said in a statement,

Starting point is 00:09:33 quote, The initiative shows how digital assets can be issued distributed and settled within the Eurozone in a single day, and confirms that a well-designed CBDC can play a critical role in the development of a safe, tokenized financial asset space in Europe. End quote. Now, this initiative is partnering with private financial institutions including Goldman Sachs, Santander, and Society General, as well as the publicly funded European Investment Bank to provide some infrastructure and participation in testing. The trial is the latest in a series of CBDC tests

Starting point is 00:10:00 by the French Central Bank over the last year, including the management of liquidity and decentralized financial models and the settlement of cross-border payments. Now, staying in the realm of CBDCs, but moving a bit east, we come to India. And if European CBDC experiments might be seen as a way to compete with crypto, the Indian approach is directly and explicitly that. Fiji Asi Reddy, the chairman of the Parliamentary Standing Committee on Transport, Tourism and Culture, writes, proud to learn that India becomes one of the initial countries to introduce a digital currency. RBI's digital rupee is the future of currency in India, backed by a sovereign entity, stable and freely convertible, it is the best alternative to cryptocurrency. So the news is that the Reserve Bank of India will begin to test

Starting point is 00:10:40 its digital rupee across four cities, including Mumbai and New Delhi, in partnership with four banks. The pilot program will commence on Thursday and will begin with a select group of customers and merchants having access to the system. The CBDC will be issued in the same denominations as existing notes and coins, with payments being made using QR codes and available both between customers and merchants and between people. The pilot will eventually be expanded to nine additional cities and four additional financial institutions. India's finance minister said in her budget speech in February of this year that the government aims to have the digital rupee operational by March of next year. While many nations have been pushing ahead with major tests of wholesale CBDCs,

Starting point is 00:11:16 i.e. digital ledgers that are used between institutions, this pilot will become one of the largest tests of a retail CBDC to date outside of China. Burma forfeaces writes, so Indian government just dropped CBDC Digital Rupee like a rapper drops an album, with total obfuscation and no nationalized debates about its potential threat to human freedom, privacy, and the power it gives the government for surveillance and suppression of free speech. Now, I think this speaks to the fact that the CBDC debate is set to really heat up this year. You can feel everyone getting geared up for it, and I think it's important. It's been a few years in the making, but it feels finally like it's the conversation that's actually going to be had. Now finally, to close out, let's move back to the U.S.

Starting point is 00:11:55 Here in the United States, Senator Ron Wyden, the head of the Senate Finance Committee, has sent letters to multiple crypto exchanges seeking details on how they protect customer funds in the wake of the FTX collapse. Senator Wyden addressed the letters to the CEOs of six major crypto firms including Binance, Coinbase, Bitfinex, Gemini, Crackin, and KuKoin. The letters acts the exchanges to explain their corporate structures, whether they segregate user assets from their own, and how they guard against market manipulation and internal conflicts of interest. Specifically, each had 13 questions. One, how many subsidiary companies fall under the exchange's umbrella? Two, does the exchange segregate customer assets from corporate or institutional assets?

Starting point is 00:12:32 Three, does the exchange use customer funds for any purpose that is not disclosed to the customer? I wonder where he's getting these questions from. Four, he asks for a list of any real estate acquisitions made by the exchange. Five, he asks about policies and procedures around suspicious trading, including wash trading. Six, he asks if the exchange, its partners or employees use customer data to inform their own trading. Seven, what is the exchange's ratio of debt to assets and debt to equity? Eight, he asks for a balance sheet. Nine, he asks, how does the exchange hold and safeguard its reserves and will the exchange publish proof of reserves?

Starting point is 00:13:03 Ten, has the exchange had external auditors conduct annual audits of financial statements? 11. Does the exchange carry any form of insurance? 12. Would the exchange participate in an industry funded insurance fund? And 13, what steps has the exchange taken to work with other companies in the crypto industry to develop protections for investors and customers? Summarizing his point, Wyden wrote, As Congress considers much-needed regulations for the crypto industry, I will focus on the clear need for consumer protections along the lines of the assurances that have long existed for customers of banks, credit unions, and securities brokers. If these protections had been in place before the failure of FTX, far fewer retail investors would be facing precipitous financial harm today.

Starting point is 00:13:42 Now, I think you will agree based on those 13 questions that so much of this should just be basic. It is, in fact, the exact type of things that Sam said he was advocating for in Washington while actually lying about to everyone in our industry. But still, even these sorts of positive questions aren't the same as actually getting regulation on the books. However, that discussion is heating up as well. With the FTX-backed statement booze now, crypto legislation facing increasing scrutiny and criticism in Congress, Senator Cynthia Lummis is pushing her bipartisan crypto bill with Kirsten Gillibrand as an alternative to achieve some level of legislative clarity on crypto in the short term. That bill, of course, is the Responsible Financial Innovation Act, which provides a

Starting point is 00:14:18 wide-ranging legislative framework for crypto regulation. Acknowledging the urgency of some critical parts of the bill, Senator Lummis said, quote, when we reconvene in January with the new Congress, I'm very hopeful that the Lummiss-Gillibrand bill will be high on our legislative agenda. Now, we may need to break it apart into standalone pieces that go to different committees. In criticizing the Digital Commodity Consumer Protection Act or DCCPA, Senator Lummis said, quote, FDX was heavily involved in drafting the bill. That bill needs to be rewritten in a way that is more effective and neutral as to business models, but very, very focused on consumer protection. Lummis reiterated the importance of achieving regulatory clarity around the protection of customer

Starting point is 00:14:54 assets from bankruptcy as a priority, claiming that her bill could have assisted. Quote, the FTX failure had they been complying with the regulatory regime in our bill, would not have happened. Their customers need to know that when a customer allows someone to custody their assets, whether it's Bitcoin or Ethereum or Solana or Cardano or anything else, that their custodied funds will be segregated from other monies. So when it goes into a bankruptcy or everything goes wrong, the customer's money is protected and not commingled with the mismanaged business entity's liabilities. Now, the unfortunate reality is that even if those bills had been in place, it still wouldn't have stopped the fraud of illicitly sending funds from customers to a sister hedge fund,

Starting point is 00:15:29 as happened in the case of FTX. But at least it would have made the first. It would have made the fraud even more clear and not just about the terms of service in FTCS's agreement, but in fact about the letter of the law as mandated from the U.S. Congress. Regular listeners know I have long been impressed with the breadth and understanding in the Lummis Gillibrand bill, although of course it's not perfect, and I share Senator Lummis' hope that it gets more consideration in the new Congress in January. Anyways, guys, that is the look from here, a lot more to come with the rest of this week. Like I said, Jerome Powell is speaking today at 1.30, and Sam is supposed to speak at 5. And I haven't even gotten into the preposterous phone calls, the first that Sam has done that just came out

Starting point is 00:16:09 yesterday, randomly being held for nine to 13 days since they were recorded. But that is a conversation for tomorrow. Until then, I want to say thanks again to my sponsors, nexus.io, circle and crackin. And thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Post-FTX, India and Europe Push Ahead With CBDCs

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