The Breakdown - The House Finally Introduces a Stablecoin Bill, But Will Crypto Opponents Even Come to the Table?

Episode Date: April 18, 2023

It’s hard to have good faith dialogue about regulation when one group involved in the discussion doesn't think the industry being regulated should even be allowed to exist. That increasingly seems to be the problem with crypto legislation. 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=   Join the discussion: https://discord.gg/VrKRrfKCz8   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW “The Breakdown” is written, produced and narrated by Nathaniel Whittemore aka NLW, with editing by Michele Musso and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. Music behind our sponsor today is “Foothill Blvd” by Sam Barsh.Join the discussion at discord.gg/VrKRrfKCz8.

In the wake of one of the most tumultuous years in crypto history, the conversations happening at Consensus 2020 have never been more timely and important. This April, CoinDess is bringing together all sides of the crypto, blockchain, and Web3 community to find solutions to crypto's thornyest challenges, and finally deliver on the technology's transformative potential. Join developers, investors, founders, brands, policymakers, and more in Austin, Texas, April 26th to 28th for Consensus 2020. Listeners of the breakdown can take 15% off registration with code Breakdown. Register now at Consensus.coindus.com and join CoinDesk at Consensus 2023. 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 produced and distributed by CoinDess. What's going on, guys? It is Monday, April 17th, and today we are previewing the battle coming up between McHenry, Gensler, the SEC, Congress. It's all going down, and we have the lead in. Now, a quick note before we dive in, this is the last week that the breakdown will be on the CoinDesk Podcast Network. If you listen to this show via CoinDesk,

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All right, guys, today, well, we've got a little bit of spice. We're gearing up for what could be a bit of a showdown tomorrow between SEC Chair Gary Gensler, one of crypto's fiercest opponents in D.C. And congressional Republicans on the House Financial Services Committee, who are, inversely, some of our industry's biggest allies. In advance of that, we're going to check in on activity from both the House Financial Services Committee, as well as from the SEC to see how things stand heading into the hearing. On Saturday, the Financial Services Committee published a new discussion draft bill

proposing to establish a comprehensive regulatory framework for stablecoins. In the final months of the previous Congress, work on stablecoin legislation was frenetic, with lawmakers attempting to negotiate a draft bill that could be put forward. There appeared to be broad bipartisan agreement that stable coin legislation was both fundamentally important and an achievable first step, an important symbolic action to prove the Congress, is capable of moving forward important legislation relevant to the crypto industry. Despite that sentiment, the previous attempt fell apart in the final weeks. Reporting at the time featured a wide

range of finger-pointing from lawmakers to explain why the legislation did not get introduced. The causes cited were everything from the Treasury Department apparently intervening around how self-hosted wallet should be handled, to the SEC insisting that stable coins should be defined as securities and fall under their jurisdiction. Earlier this month, an anonymous former government official familiar with the situation said, quote, the stable coin legislation was coming together over the summer, and the SEC was known to oppose it. I think the true aim was to stop any stablecoin legislation, which interestingly was at odds with the position that they took with the president's working group report.

It tracked with their activities now, which is essentially claiming through enforcement action that all stablecoins are securities. End quote. One of the key complaints was that during consultation on the bill, the SEC put forward a stable coin definition that would have been so restrictive that it would not recognize any of the existing stable coins. And this, I think, really gets at the nut of where things landed by the end of last year. John Rizzo, a former U.S. Treasury spokesperson, and explained some of the issues he had seen during his time in Washington last month in an op-ed for Coin desk. He wrote, many on the progressive left believe that government regulation of stable coins in crypto more broadly would provide undue legitimacy. In other words,

even restrictive legislation would still suggest that crypto was allowed, that stable coins were a legal thing to create. And over the course of last year, the part of the U.S. government apparatus that wants crypto not to have any legitimacy to not be a legal enterprise has done nothing but grow. We discussed last week how this position got its clearest voice yet in an editorial piece by Professor Hillary Allen that was published in foreign affairs. As I said then, I think the fact that this is now being a vocal, clear, loud, articulated position suggests that it's been growing behind the scenes for some time. And clearly as we now look back at stablecoin legislative efforts last year, it was a part of the discourse even if it wasn't being said out loud. So then what is in this new bill?

Well, according to House Financial Services Committee Chairman Patrick McHenry, this draft bill is the same one that had been circulating throughout D.C. last year and is now being made public for the first time. There are some pretty common-sense elements of it. It would place the Federal Reserve in charge of non-bank stablecoin issuers like Tether and Circle. Banks and credit unions could seek approval to issue a stable coin from their existing regulator. Registration with a regulator would be compulsory for all issuers who want to do business in the U.S., so far, all things that you would expect. Now, when it comes to reserves, in this draft, Stablecoin reserves are not mandated to be held in any particular form, but reserve stability is considered in granting

registration applications. In this consideration, the legislation specifically expresses a preference for full reserve or one-to-one backing held in cash, short-duration treasury bills, and other cash-like instruments. The issue of how to deal with FDIC insurance for Stable Coins was put off for another day, with the legislation stating clearly that Stable Coins are not insured, nor are they considered to be, quote, backed by the full faith and credit of the United States, like other forms of U.S. dollars. One positive part of the draft legislation, it explicitly considers self-custody and would provide carve-outs to exempt wallet software providers from registration requirements. Now, in the crypto industry, there are obviously many types of things that we call stablecoins.

This legislation would place a two-year moratorium on newly issued stablecoins that are quote-unquote endogenously collateralized. That's what this industry typically refers to as algorithmic stablecoins, such as the ill-fated Luna-UST pair. The Treasury would be required to study these mechanisms and report their findings to Congress within a year. Existing algorithmic stablecoins would be allowed to continue to operate under this two-year ban. Now, there was a lot of concern on Twitter that this moratorium would cover stablecoins

with crypto asset backing like Dai, but the definition in the legislation seems sufficiently narrow to allow them. It only covers stablecoins that, quote, rely solely on the value of another digital asset created or maintained by the same originator to maintain the fixed price. In other words, it sees the issue as at least in part the conflict of interest between the stable coin issuer and the asset issuer, as opposed to just being a priori against digital assets as a collateral source. Another aspect of these rules would be that banking regulators in the National Institute of Standards and Technology would be empowered to set interoperability. standards for stablecoins, including technical and legal specifications, with a view to allowing

users to clear and settle across different payment networks without having to purchase native stable coins for each network. Finally, the Federal Reserve would be instructed to study the effects of a digital dollar issued by the central bank. The Fed is, of course, already undertaking technical and structural research around a potential CBDC, but this legislation would direct the scope of the research to explicitly include monetary policy, financial stability, and privacy for individuals among a multitude of other areas. It would also require a report on the research to be provided to Congress within a year. Now, perhaps the most notable feature of this draft bill is that it was released with very little publicity. Now, that's different from our standard pattern, which has been politicians

releasing bills that they know don't have a chance to actually make it through, just as a way to score political points, either for their pro or against crypto perspective. Maybe that means that lawmakers aren't trying to use this particular legislation as a political football and are more interested in just getting it done. Now, interestingly, although Tuesday's hearing with SEC Chair Gary Gensler is the one that many in crypto are watching, the House also announced another hearing for this week that will probably be a lot more productive. On Wednesday, the House Financial Services Committee's Digital Asset Focus subcommittee will hold a hearing on this Stablecoin legislation. Witnesses for that hearing include the New York Department of Financial Services Superintendent Adrian Harris, who of course oversaw

the shutdown of Signature Bank in March, as well as the winding up of Paxos issues Stablecoin BUSD in February, but the subcommittee will also hear from three crypto advocates, including Jake Trevinsky, the chief policy officer at the Blockchain Association, Dante DeSparte, the chief strategy officer at Circle, and Columbia Business School professor Austin Campbell, who was previously the head of portfolio management at Paxos. This is honestly the first time in a very long time that we've actually had really good witnesses at a hearing. And when I say that, I do include Adrian Harris, because at least this is a person who is actively engaged in the implementation of policy, rather than just some professor who has an intellectual bone against crypto, so hopefully it will be productive.

Jake Chravinsky tweeted, On Wednesday, I will testify before the House Financial Services Committee on digital assets in a hearing on stablecoin legislation. Last month, the Blockchain Association urged Congress to move forward on stable coin legislation and outlined five principles that a good stablecoin bill must follow. I'm excited for the chance to testify about why stablecoin legislation should be top priority. Now, here are the principles he's referring to from an earlier Twitter thread. First, Jake writes, Congress should focus on custodial stablecoins, meaning those issued and redeemed by firms holding assets backing the stable coin in a bank or other financial institution. Second, both banks and non-bank should be allowed to issue stablecoins.

There is no valid reason to require all stablecoin issuers to get bank charters. Non-banks can issue stablecoins that are just as safe as those issued by banks, given the right rules and regulations. Third, assets held by stablecoin issuers to back the stable coin should be limited to specified high-quality liquid assets that meet a minimum standard of safety and soundness. The regulator authorized to oversee issuers should also be allowed to approve other assets. Fourth, stablecoin issuers should be subject to operational requirements, such as making public disclosures regarding assets held as backing for stablecoins, segregating those assets from corporate funds, conducting routine audits or evaluations by public accounting firms. And fifth, stablecoin should be overseen by a prudential regulator

such as the Fed or the OCC, and should be exempt from overlapping regulation by the SEC or the CFTC. This is necessary to provide regulatory clarity and clear delineation of responsibility between agencies. So that's what Jake and the Blockchain Association think should go into these rules. But what about the critics? Well, Professor Hillary Allen, who I just mentioned as someone who had just written about why crypto should be banned entirely, unsurprisingly had some problems with this. It seems like her biggest issue is the idea of stablecoin issuers having access to Fed services. She writes, so the HFSC stablecoin bill dropped, TLDR, it won't fix problems with stablecoins, which aren't used for payments anyway, but it will extend government safety net to more

firms. The bill contemplates that stable coin issuers, bank, and non-bank get access to discount window and to Fedmaster accounts, which presumably will come with daylight overdraft protection from the Fed. The financial safety net here is being extended to non-banks. Now, to me, this seems like a kind of weird thing to have as the centerpiece of your critique of this, specifically because these stablecoin issuers are huge holders of U.S. treasuries. So I'm not sure why you wouldn't want those large holders of treasuries to not have discount window access. It's hard not to read this critique, and to go back from the position of the folks who killed Stablecoin legislation last year, that any regulation would in fact legitimize the industry. If that's the issue, then it's just

about finding things to complain about because you don't want any regulation at all. So that is what's happening with the House. Now, what about with the SEC? Well, the big thing is that it's going after another exchange, this time BitTrecks. On Sunday night, news broke that the embassies that the embattled U.S.-based crypto exchange had received a Wells notice from the SEC, informing them of incoming enforcement action. The strange thing about this notice was that Bitrex had already announced last week that they would be winding down U.S. operations starting next month. In 2017, Bitrex was the largest U.S.-based crypto exchange by volume, but has struggled in recent years.

Most notably, they agreed to pay a fine in more than $29 million to the U.S. Treasury for sanctions violations in October of last year, and agreed to undertake intensive rectification work on their compliance system. According to Bitrex's General Counsel, David Maria, the firm has to say, had discussed with the SEC in late 2022 how to register its crypto operations, but found, as so many others have found, that there was no pathway to registration without ceasing all of their revenue generating operations in the U.S. Maria said, quote, the lack of regulatory clarity here results in substantial costs and no certainty as to what can and can't be offered. Now on Monday,

this was all followed up by an actual lawsuit. Press release reads, SEC charges crypto asset trading platform BitTex and its former CEO for operating an unregistered exchange broker and clearing agency. Bitrex Global, GMBH, also charged for failing to register as a National Securities Exchange. One of the most important parts from the press release was this paragraph. The complaint further alleges that Bitrex and Shihara, who is the company's CEO from 2014 to 2019, coordinated with issuers who sought to have their crypto asset made available for trading on BitTrex's platform to first lead from public channels certain, quote, problematic statements, that Shihara believed would lead a regulator such as the SEC to investigate the crypto

asset as the offering of a security. For example, in an effort to avoid regulatory scrutiny, before Bitrex would make an asset available on its platform, Bitrex and Shahara instructed issuer applicants to delete statements related to price predictions, expectation of profit, and other investment-related terms. Gensler tweeted, today's action yet again makes plain that the crypto markets suffer from a lack of regulatory compliance, not a lack of regulatory clarity. Austin Campbell retweeted that saying, says the guy alleging things are securities that they never said are securities now, for reasons they explain beforehand or in the suit they just filed as of yet, while multiple other regulators also claim jurisdiction and where if you try to comply, you get shut down. Jacob Franik writes,

crypto asset security is not a thing. Gensler made it up and thinks if he repeats it enough, it will magically become law. And indeed a lot of what crypto Twitter was discussing was the fact that the SEC claimed specific tokens were securities. That includes most notably, Algo and Dash, but there were also another handful accused of being securities as well. Meta Lawman James Murphy writes, another classic Gary Gunsler move, Bitrix announces two weeks ago that it was exiting the U.S. market because of the chaotic regulatory environment here. So Gensler sues them on the way out the door. Reminds me of the time Gensler sued FTX after it declared bankruptcy. Proof of talents, Rob Payone wrote something similar. Gary going after

companies that haven't been relevant in years. Very brave. Much investor protections. Brown Rudnick partner Preston Byrne writes, here's what's going to happen to American securities regulation in this area. Inside of a decade, some crypto biz based in Nigeria facilitating trade flows to China, will have 20x the number of clients that Schwab does and absolutely nobody's going to care what U.S. regulators think. Speaking as one who will never benefit from Social Security, missed the boomer housing boom, and who can get 0.5% at a bank when inflation is at 10%. The fact that the SEC is trying to bar the exits to this system, while making no allowance for legit projects is a disgrace. The risk isn't the issue. People buy high-risk stuff all the time via EG crowdfunding platforms.

The Europeans are creating a disclosure regime. So should we. And the fact that we don't betrays the government's intentions. They don't want the sector regulated. They want it dead. Mike Wazizek, the General Counsel at Alliance Dow, writes, at some point, SEC lawyers need to step up and advise their client, non-lawyer Gary Gensler, that the law doesn't say what he thinks it does, and that what he'd like to do is not exactly legally coherent.

And that, of course, is what's going to be on trial at the hearing tomorrow. The oversight of the SEC hearing, with just Gensler testifying, is set to start at 10 a.m. on Tuesday, April 18th. And you better believe that we will be watching and reporting on what happens. All right, guys, that's it for today. As always, I appreciate you listening. Don't forget to go subscribe to the breakdown main feed. Again, Sunday, April 23rd is the last day that the breakdown will be on the CoinDesk

podcast network feed. And until tomorrow, be safe and take care of each other. Peace.