The Breakdown - The Biden SAB121 Veto Undermines Claims of a Democrat Crypto Pivot

Episode Date: June 3, 2024

After reports last week that the Democrats were shifting their stance on crypto, one of the big questions was whether President Joe Biden would follow through on his promise to veto the repeal of SAB121. He did, and NLW gauges the community's reactions. 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, June 3rd, and today we are talking about Biden's veto. 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. All right, friends, well, we have been doing the play-by-play of the political shifts when it comes to crypto, and assuming that some of you have been on a nice vacation for a couple of weeks. Effectively, Donald Trump talking about being the crypto candidate at a campaign event a couple of weeks ago,

really set the starting gun that has totally shifted the politics around this industry. Towards the end of last week, there was a sense among some that even Democrats were shifting their stance. There had purportedly been some reach-out from not just the Democrats that have had a long-standing support for the industry, but the White House itself to try to sort of right the ship. There was at the same time quite a bit of skepticism from the crypto industry around how deep or sincere the change really was. And one of the big questions was going to be how actions did or did not back it up. The first of those actions was inevitably going to be whether President Biden followed through on his promise to veto the repeal of SEC Staff Accounting Bulletin

121. Well, late Friday night, those who had hoped for a real shift in administration policy were appointed, and the White House followed through with its threat of a veto. Now, as I mentioned, SAB 121 had become a bellwether for crypto sentiment and industry support in Washington over the past month. The bill to repeal the accounting guidance gathered support from 21 House Democrats and 12 senators. Many had assumed that this show of bipartisan support in defiance of the threat to veto would be enough to make the White House reconsider its position. Hopes were dashed, however, on Friday night when President Biden confirmed the veto. A statement from the White House noted that SAB 121 reflected the views of technical

SEC staff on accounting obligations that already existed. It said, quote, this reversal of the considered judgment of SEC staff in this way risks undercutting the SEC's broader authorities regarding accounting practices. The statement explained that, quote, by virtue of invoking the Congressional Review Act, this Republican-led resolution would inappropriately constrain the SEC's ability to set forth appropriate guardrails and address future issues. Therefore, the administration said it would not, quote, support measures that jeopardize the well-being of consumers and investors. Appropriate guardrails that protect consumers and investors are necessary to harness the potential benefits and opportunities of

crypto asset innovation. The White House claimed it was still eager to work with Congress to ensure a, quote, comprehensive and balanced regulatory framework for digital assets, building on existing authorities which will promote the responsible development of digital assets and payment innovation, and help reinforce United States leadership in the global financial system. The logic behind the veto largely follows the complaints raised on the House floor by Democrat ranking member Maxine Waters. The point wasn't so much that the accounting guidance is good policy, and Democrats were standing behind its contents, although there were some Democrats who took that position. Instead, it was the functional issues with using the Congressional Review Act to carry

out the repeal. After a rule has been blocked by the CRA, an agency is prohibited from presenting a rule in, quote, substantially the same form. Democrat leadership are suggesting that this would prevent the SEC from dealing with crypto custody guidance more generally moving forward. The veto generated predictable outrage across the crypto industry, but more surprising is the level of defiance it provoked from the banking industry. On Friday afternoon, just hours before the veto was issued, the banking lobby wrote to the White House, urging them to back down. A group of four financial industry lobbying groups wrote, SAB-121 effectively precludes regulated banking organizations from offering digital asset custody at

scale, since it treats the assets as if they are owned rather than simply custodied by a banking organization. Institutions that are forced to record custody digital assets on balance sheets are subjected to higher capital, liquidity, and other prudential requirements, unlike their non-bank competitors. What's more, this back-to-a-prohibition on banks providing crypto custody has become a much more contentious issue since the launch of the Bitcoin ETFs. Most of these issuers are offering these products on a slim or negative margin. Meanwhile, Coinbase saw a $10 million revenue boost during the first quarter just from acting as the primary custodian for most of the ETFs. For the past few months, the banking industry has made it clear they want in on this growing

market. And beyond that, they view the guidance as simply bad policy, stating in their letter, SAB 121 represents a significant departure from longstanding accounting treatment for custodial assets and threatens the industry's ability to provide its customers with safe and sound custody of digital assets. Limiting banks' ability to offer these services leaves customers with few well-regulated trusted options for safeguarding their digital asset portfolios and ultimately exposes them to increased risk. This point that SEB 121 is bad policy was also picked up by Republican lawmakers. Senator Cynthia Lummis said in a statement,

The SEC should never use staff accounting bulletins to determine policies, especially for industries it does not regulate. Yet that is the new norm under President Biden's leadership. Congress gave this administration the opportunity to correct its position on crypto assets, but instead of listening to the will of the American people and reigning in the SEC, President Biden doubled down on his administration's failed policies at the expense of American consumers. I will not stand idly by as this administration attempts to skirt the law, and I will continue to fight to promote financial innovation and keep protections for crypto assets,

this administration seems hell-bent on stifling. Earlier in the day, Lammis had sent a letter to Biden urging him not to veto the bill. She focused on the fact that the SEC had used a staff bulletin to avoid going through the formal rulemaking process. Even some pro-crypto Democrats had pointed out that the SEC could have simply withdrawn the bulletin and spared the White House from making this decision. That was, in fact, where a lot of the assessment was before this happened, that perhaps the White House had boxed themselves in with this veto promise, but that the best way to deal with that might be just the SEC withdrawing the bulletin and taking the L themselves. In either case, crypto lobbyists

capture the disappointment of the industry. A statement by blockchain association said, this repeal, the Biden administration is swimming against the tide of public opinion and growing consensus in Congress, that digital asset innovation should be supported, not punished. We hope that the administration can pause, reconsider its position, and work with our industry to design fit-for-purpose regulation under which the digital asset industry can thrive in the United States. Over on crypto Twitter, the sentiment was much less magnanimous. The people who have spent the last few weeks warning that the Democrats weren't serious about changing their crypto position had an ample serving of I Told You So's. Mike Dutis of Six-Man ventures tweeted,

Everyone who said crypto isn't partisan in America was dead wrong. Joe Biden just threw a middle finger up to crypto innovation against the will of both houses of Congress. An absolutely disastrous decision for the Democratic Party, it will cost them dearly in November. Crypto lawyer Gabe Shapiro wrote, All of you people who have been on here for weeks saying the Dems have turned a corner and they like crypto now and crypto is now bipartisan should seriously be ashamed of your Stockholm syndrome naivety. Most Democrat supporters within the community, meanwhile, were dumbfounded by the decision. Mike Novogratz of Galaxy Digital wrote, this is disappointing and may be predictable, snatching defeat from the jaws of victory.

The Dems were trying to defuse Trump being the crypto president and were doing a great job, but this doesn't help at all. Whoever is advising Biden needs to have his head examined. Of Electric Capital tweeted, Biden just lost the crypto vote. What a stupid, stupid mistake. CEO of the Crypto Council for Innovation tried to make the point that not all Democrats are anti-Crypto tweeting, kind of wild to have to say out loud that Biden is not the Democrats. Dem votes still stand on SAB-121, and they took those votes knowing they were almost certainly going against the president. It's like holding faculty members responsible for the actions of the president of the university, or devs responsible for the actions of a founder, also telling that they tried

to dump this veto out with the trash on Friday evening versus shouting it from the rooftop's Monday morning. The Friday night news dump clearly indicated that the White House knew this would be unpopular, but it also speaks to how misguided and hollow their engagement with the industry has been so far. Laura Shin of Unchained commented, for example, um, clearly they don't know that crypto people are online all the time. Sarah Brennan, the General Counsel of Delphi Ventures, suggested the timing itself was a sign of bad faith, tweeting, 7 p.m. on a Friday is a coward's move. There is no good faith reason for SAB-121 to exist. If someone shows you who they are for the thousandth time, believe them. Others with a less partisan slant were still utterly confused by this choice. Point Base chief

policy officer Faria Shirzod tweeted, the president was not served well by his team. He is using his extraordinary veto power to protect a sneaky bureaucratic move by the SEC chair to hide behind his staff to destabilize an entire industry. If SAB 121 were a formally ratified agency rule, it would be one thing. But for the White House to prepare a veto statement that puts the president in the position of defending the considered view of the agency's staff that were never lawfully considered by the commission itself, against significant bipartisan majorities in both houses of Congress is a disservice to Joe Biden and the office of the president. Lightspark co-founder Jay Masari wrote, crypto policy is complex. But the SAB 121 veto is impossible to square with an

agenda that is pro-consumer protection, pro-innovation, or pro-competition. SAB-121 treats digital asset custody by large regulated financial institutions punitively, and differently from that of any other kind of asset, without any meaningful or supportable policy or regulatory basis. The direct result? Less choice and convenience for consumers that want digital asset custody services. It was the SEC's use of accounting guidance to impose these rules that raise concerns about, quote, undercutting the SEC's broader authorities regarding accounting practices. Perhaps crypto policy is not at the top of the administration's list, but the damage done from this approach to regulation goes far deeper and broader. We should not be

content with an anti-consumer protection, anti-innovation, and anti-competition approach to governing, insisting that it is the opposite does not make it so. Beyond the policy considerations, the political choice was simply bizarre. Over the last month, it's become clear that Democrats are aware that crypto is an issue that has the potential to swing the election. Either the Biden campaign didn't understand that the veto would be seen as crossing a line in the sand, or they knew this and chose to do it anyway. Katie Bieber, the chief legal officer at Paradigm tweeted, puzzling amateur hour political mistake. For those unaware, this means regulated financial institutions cannot hold crypto for clients. It makes no sense. Jeff John Roberts, the crypto editor

at Fortune, commented on how this misstep will show up at the ballot box, tweeting, this is a dumb hill for Biden to die on. Vito will earn exactly zero votes but will likely cost him 500 votes in Wisconsin, Michigan, Pennsylvania, Arizona, and Nevada. Overall, this is a really rough moment, especially for those who had hoped to see a more nonpartisan shift. And all it is doing is reinforcing that the industry has to be here for a fight. An example of that, Coinbase has filed their final brief in their lawsuit to force the SEC to publish crypto rules. This case was filed a few months before the SEC brought enforcement action against the exchange, and it is now headed to appeals court after an order which deferred to the SEC's stance that existing rules are sufficient.

Coinbase came out swinging in the brief claiming that, quote, the SEC is serious about the destruction of digital assets, end quote. Coinbase wrote that the industry is caught in a catch-22, where the SEC has asked firms to comply with incoherent rules while launching, quote, scorched earth litigation against those firms for their failure to do so. They continued, this pattern of conduct is a purposeful effort to destroy an industry by demanding the impossible and prosecuting companies that fail to achieve it. So, that is the update for today. It'll be particularly interesting, I think, to see if and how pro-cryptodems or the White House itself tries to continue this name.

narrative of a shift in the wake of this decision. For now, though, it is not looking good for non-partisanship when it comes to the crypto industry. That is going to do it for today's breakdown. Until next time, be safe and take care of each other. Peace.