The Breakdown - The Senate Doesn't Seem to Care About Crypto Anymore

Episode Date: September 13, 2023

Another day, another set of high profile departures from Binance. NLW explores the latest news around the beleaguered exchange as well as community reactions. The show also looks at Gary Gensler's testimony before the Senate. 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, September 13th, and today we are talking about news that Binance U.S. CEO has left the company. 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 at the show notes or go to bit.ly slash breakdown pod. Well, friends, last night I had assumed that today's show would be some combination of Gary Gensler testifying before the Senate with maybe a little side of CPI, but then last night new Binance news broke that had the whole community chattering, so that's where we're going to

start. According to anonymous sources, Binance U.S. CEO Brian Schroeder has left the company. Chief legal officer Norman Reed will step into the role on an interim basis, alongside the resignation, Finance U.S. announced internally that it will slash around one-third of its workforce laying off approximately 100 employees. This is the second round of layoffs for the U.S.-based exchange as they dig into fight legal battles against the SEC and the CFTC. Binance U.S. said in a statement, The actions we are taking today provide Binance U.S. with more than seven years of financial runway and enable us to continue to serve our customers while we operate as a crypto-only exchange.

The SEC's aggressive attempts to cripple our industry and the resulting impacts on our business, have real-world consequences for American jobs and innovation, and this is an unfortunate example of that. Now, if you are paying attention not even closely, just at all, you will know that this is the latest in a series of high-profile departures across the Binance Empire. At least 11 executives have now resigned across all Binance companies. Three key personnel left on the same day in July, including front-facing chief strategy officer Patrick Hillman, amid rumors of dissatisfaction with how Binance CEO-CZ handled rumors of a DOJ investigation. Five more executives quit earlier this month with the headline resignation coming from Leon Fung,

the head of Asia-Pacific operations. In all cases, the resignations have been officially explained by a range of personal reasons, probably capstoneed by former compliance officer Stephen Christie's extremely weird Twitter thread, which included the statement that, quote, apparently I need to start helping around the house do chores and start making dinner a few times a week. And as any happily married person out there knows, happy wife equals happy life. Now, the wide-ranging lawsuits against Binance have largely come home to ruse for their U.S. subsidiary. Both the SEC and CFTC cases include allegations that reach deep within the international finance empire. However, regulators have been careful to focus their attention on Binance-US to ensure

that they have clear jurisdiction. A key focus of litigation so far has been the flow of funds between Binance U.S. and the international organization. All of this means that the focus on the domestic exchange has led to the U.S. subsidiary taking the brunt of the consequences so far. More acutely, Binance U.S. was essentially cut off from all access to onshore banking, forcing them to operate as a crypto-only exchange. This shutdown of financial services has led to a dramatic collapse in trading volume. Binance U.S. captured around 22% of U.S. market share in April, but this figure has now dropped below 1% as traders quite reasonably flee to safer shores. Schroeder is now the third Binance U.S. CEO to walk away from the role.

Both Catherine Coley and Brian Brooks, who earlier served as CEOs for the exchange, have provided extensive testimony to regulators and law enforcement. Schroeder joined the firm as president in September 2021 well into the company's claimed attempt to clean up their operations. One consequence of that could be that he has significantly less scandalous information on how the exchange function than other former executives. So what are the community's takes on this? Well, as you would expect, the anti-crypto folks are cheering. They see Binance as the next and perhaps ultimate shoe to drop. However, many folks in the industry, regardless of what they think of Binance, view it as a sad episode. that shows just how problematic the SEC's approach really is.

Wolf of All Street's host Scott Melker said, The SEC killed Binance U.S. without proving a single thing, without due process. It simply took accusations to scare away customers and partners. This is the legacy of Gary Gensler. Now, another take which I resonate with strongly comes from folks like Byzantine General who wrote, I don't know why people are up in arms about this. I thought it was quite obvious already since the SEC lawsuit

that Binance was just going to wind down operations of their U.S. branch. it's so small and completely inconsequential to Binance anyway. Or more crisply from icebergy, just closed down Binance US already. It has seemed untenable for quite some time, and this only seems to reinforce that point of view. Now, the other big generator of conversation was investor Adam Cochran. He tweeted, I've been saying if Binance blows up will be fine in no time. Got a tip that I've not yet been able to fully verify, but I would lean towards it being true on, and if it's true, it'll be a longer, more painful ride than I thought. And life behind bars would be the good outcome for CZ. I've sent that tip to some journalists I think can confirm if

it's real, and will keep folks updated if I get anything back. But in good faith, I had to redact my will-be fine stance and replace it with, will probably be okay unless this other part is real, in which case, Holy F, we're really going to zero and going to have to rebuild up again over time. Anyway, fun times in crypto. Now, this certainly got people chattering, but not always in a good way. Zero Knowledge Consulting partner and founder Austin Campbell quote tweeted it and said, if you have a financial interest in an outcome and post that you have a rumor without saying what the rumor is, you are part of the problem in this space. This would have been prohibited conduct in most regulated markets. I certainly would have gotten in trouble for this at JPM. Now, interestingly,

however, for Lex 4 Shaw had a different take. They wrote, it's all so tiresome. Binance had the support of dozens of governments from Singapore to UAE to every corner of the global south, and Tether too. The U.S. can't cut the UAE, Cayman's Bahamas and Singapore out of Eurodollar markets, so it can't de-dollarize Binance. Any successful prosecution of Binance has to cut off Binance's access to USDT, cut Binance off from access to UAE, Singapore, etc., euro dollars, or prove beyond a shadow of a doubt a huge hole in Binance's balance sheet, i.e. accounting fraud. Everything else is just low-budget theater. If the U.S. can accomplish one of those things, Binance is dead. If the U.S. can't, CZ doesn't have to give a crap about what the U.S.

government says, indicts, or cajoles. The latter possibility breaks a lot of people's brains, but I don't make the rules. The interesting take here is, of course, that in many ways the tether and Binance stuff going on is kind of just a proxy war for the U.S. about the U.S. government trying to exert sovereignty over the Eurodollar market that they simply don't control. I think it's a really interesting lens through which to look at these prosecution efforts, as well as questions around U.S.D. stable coins.

Anyways, who knows what happens next with Binance, but it continues to be the biggest open question in the entire space. Now, moving back over more officially to the U.S. government side of things, SEC Chair Gary Gensler appeared before the Senate Banking Committee on Thursday at a routine oversight hearing. Now, coming into the hearing, Gensler reinforced his well-worn position on crypto and written testimony. He stated that, quote, given this industry's wide-ranging noncompliance with the securities

laws, it's not surprising that we've seen many problems in these markets. We've seen this story before. It's reminiscent of what we had in the 1920s before the federal securities laws were put in place. Brushing off the recent ripple decision, Gensler asserted that, quote, the vast majority of crypto tokens likely meet the investment contract test. Given that most crypto tokens are subject to the securities laws, it follows that most crypto intermediaries have to comply with securities laws as well. Now, the hearing itself was kicked off by opening statements from Chairman Sherrod Brown. As the leading Democrat dealing with financial issues, any crypto legislation being moved forward

in the near future would likely require Brown seal of approval to become law. Judging from his comments about the state of the industry, that seems unlikely. Brown said, quote, The FTX collapse showed how dangerous crypto can be. But FTX wasn't a lone bad apple. It was just the most explosive example of the problems in crypto. The problems we saw at FTX are everywhere in crypto. The failure to provide real disclosure, the conflicts of interest,

the risky bets with customer money that was supposed to be safe. FTX was just the biggest and the ugliest. For consumers, it adds up to billions of dollars gone. Bad actors keep flocking to crypto. They use it to launder money to evade sanctions. to fund crime and human trafficking and terrorism. We need to protect workers and families in these markets. We need to clean up the scams and fraud.

As Congress considers digital asset legislation, I'm glad the SEC is using its tool to crack down on abuse and enforce the law. Now, of course, a casual observer might suggest that, one, FTX was distinct, given that its former CEO is on trial for perpetrating fraud against his company, investors, partners, and the public at large, and an observer might note that the SEC didn't use its tools to do anything about that or any of the other big examples of actual fraud and problems happening.

Instead, it's rode in after the fact to win settlements against projects too small to defend themselves and chalk it up as victories, which might, to some, be seen as much more politically motivated than actually driven by consumer protection. But that's just one take. Now, ranking Republican member Tim Scott used his opening comments to drag Gensler for his lack of engagement with congressional oversight. Scott noted that the Senate hasn't heard from Gensler since last September, despite the FTX collapse and several bank failures occurring in the interim. He said, quote, complete and timely attention to congressional inquiries is critical to ensuring independent

agencies remain transparent and accountable to the American people. Yet sadly, your agency has fallen short in this obligation to be transparent and responsive to congressional oversight. Without pro-growth regulations, we are limiting opportunities for our kids and our kids' kids' from being able to take control of their own financial futures. The American people have a right to know what their government is doing, and your agency's blatant refusal to respond to our constitutionally-maned, and it oversight represents a dereliction of your duties to the American people.

And yet still, when all was said and done, the most striking thing about the hearing was just how much crypto had faded as a front-of-mind issue in Congress. Gensler didn't mention crypto at all in his brief oral testimony, and lawmakers had numerous more pressing concerns to discuss. Based on the questions, climate reporting rules and AI use in financial services ranked as much higher priority than crypto enforcement, even for previously fervent Democrats. We didn't even get the customary anti-crypto soundbite from Senator Elizabeth Warren, who instead used her time to rail against a perceived lack of toughness in new private equity disclosure rules. The crypto discussion, to the extent there was any,

touched on pending crypto ETFs. Senator Bill Haggerty brought up the point that the SEC's rejection of the gray-scale Bitcoin Trust had been labeled arbitrary and capricious by a federal judge. He asked what the SEC would need to see in order to approve a spot Bitcoin ETF, to which Gensler responded that the agency is, quote, still reviewing that decision and reviewing multiple filings around Bitcoin ETPs. I'm looking forward to staff's recommendations. Now, on top of some of those specifics, many GOP senators had more general criticisms for how Gensler's SEC had conducted itself.

Senator Steve Daines, for example, complained that the SEC has frequently overreached its mandate in attempts to expand its jurisdiction. He suggested that 80% of the SEC's rulemaking efforts under Gensler were not required by legislation. Dane said, this means that the vast majority of the agency's rulemaking agenda has been voluntarily undertaken. Chairman Gensler, you are not unelected official that is beholden to your constituents. You are an unelected bureaucrat who has taken.

it upon himself to reshape American financial markets to your liking, to the detriment of innovation, of investors, and small businesses. What's more, it seems like many in the Washington establishment are not just concerned about Gensler when it comes to the crypto markets. Earlier this week, for example, the Wall Street Journal published an op-ed article penned by former U.S. Attorney General Bill Barr. Specifically, the article warned of Gensler encroachment into regulating the use of AI. But Barr was scathing in his attack of Gensler's leadership at the SEC more broadly. He wrote, this is only the latest example of Mr. Gensler's grandiose regulatory style. He takes on airy theoretical issues and attacks them with broad prophylactic regulations that are long on speculation

and paternalism, short on evidence and rational analysis, and heedless of Congress and the Constitution. He claims these measures will head off speculative evils, but they are more likely to throttle the dynamism of U.S. markets. So how are we to sum this all up and make sense of it? To me, this was very clearly the first hearing of the next election cycle. Crypto is now, an afterthought for Congress. Or maybe better put, it is an exhibit and an example of a broader narrative, which is around SEC overreach. It seems fairly clear that people aren't that interested in getting regulation done for the industry, and even on the GOP side, are more interested in defeating a broader political agenda embodied by Gensler. The big themes were agency

overreach, major questions doctrine, and the role of unelected bureaucrats, not crypto per se. But to the extent that anyone is looking for good news as relates to the election cycle, as finance lawyer at Davis Polk, Scott Johnson pointed out, for those keeping count, Senator Sherrod Brown's odds are about 60% chance to lose his seat next year as of now. Change isn't always necessarily good, but it certainly opens up new possibilities, but gear up because we are definitely in the election part of the cycle. Thanks as always for listening, and until next time, be safe and take care of each other. Peace.