The Breakdown - The Senate’s Arguments Against Stablecoins

Starting point is 00:00:00 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 Nidig and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, December 15th, and boy, is there a lot to catch up on today. First, we are going to talk about the stable coin hearing in the Senate yesterday. It was the Senate Banking Committee. and this was of course the follow-up to the overwhelmingly and perhaps even surprisingly positive House Financial Services Committee last week.

Starting point is 00:00:44 If you missed my episode about the House Financial Services Committee hearing on crypto, it was unexpectedly positive, proactive, bipartisan. This was the hearing that had a set of crypto CEOs from Coinbase, FTX, Circle, and more, And really the stand-out thing from that session was the sense that these lawmakers were now treating this industry, this technology, as something that existed, as something that had lots of potential, as something that had specific issues that they wanted to deal with, but as something that was here, not to be banned out of existence, not to be regulated away, but something real and potentially positive. And that was the tone from both sides. There were still

Starting point is 00:01:31 plenty of people who had specific issues or issues that they cared more or less about than others, but it was a very encouraging moment. Heading into this one, there was a lot more expectation of contentiousness, and that's for a few reasons. First, Senate Banking Committee chair, Sherrod Brown, has made Stable Coins of focus. At the end of November, he sent letters to a number of stablecoin issuers with a set of rather pointed questions that he wanted answered. On top of that, we also have recently had the President's Working Group report on Stable Coins, which advocated among other things that only depository institutions be able to issue stable coins.

Starting point is 00:02:07 Many of the guests that were invited were also sort of relatively anti-stablecoin academic and think tank type people versus industry representatives. And so all in all, like I said, there was an expectation that it wouldn't be quite the roses and positive outlook that last week was. Jake Chravinsky tweeted before the hearing, Senate Banking Committee hearing on stable coins today. Look, this will probably be painful. Crypto antagonists aren't happy about how productive and bipartisan last week's hearing was,

Starting point is 00:02:34 so they're out to get even. Just remember, the loudest voices are rarely the ones that matter. So, it wasn't as long as last week's hearing, but it was still definitely a little bit different in tone. Whereas there was very little grandstanding in the last one, this one was definitely a chance for many to advocate their anti-stable coin agenda using cherry-picked witnesses and statements on the public record. But rather than just be dismissive of that, I think it's worth trying to understand the overarching narrative that these opponents are trying to push. I think one of the key aspects of this is the notion that crypto is not innovation at all.

Starting point is 00:03:11 It is in fact just a new version of the old system. We've seen this theme weirdly pop up over the last few weeks. The notion that somehow it's the big banks that are getting enriched by crypto, which while seeming like a quite weird line of attack, is something worth noting given how often it is starting to appear. In his opening statement, Brown said exactly this, said that crypto wasn't innovation but a clone of our, quote, broken banking system with no rules at all. On top of this general idea, there was also a lot of hammering on the idea of high fees. Lots of examples of complaining that when someone wants to withdraw $100 of their stable coin of choice to buy groceries,

Starting point is 00:03:48 they're going to be hammered with some sort of fees. Now, this, of course, sort of misses the whole notion of a system that accepts stable coins, but that was clearly neither here nor there for those antagonists. What's more, Elizabeth Warren has definitely decided to be the loudest voice against stablecoins. After the hearing, she tweeted, stablecoins pose risks to consumers and to our economy. They're propping up one of the shadiest parts of the crypto world, DeFi, where consumers are least protected from getting scammed. Our regulators need to get serious about clamping down before it's too late. She even during the session raised the specter of terrorism, saying because in DeFi, you can't even tell if you are dealing with a terrorist.

Starting point is 00:04:26 Still, I think overall one of the most concerning lines of questioning was about whether you could use the programmability of stable coins to prohibit certain types of purchase activity. Could you allow people, for example, to buy things from merchants who accepted it, but not allow it to be used for speculating in crypto or gambling? This was asked with more than a little excitement at the possibility, and that's something to be concerned about. The issue here, of course, is that we're watching some set of politicians seem to be excitedly getting into the territory of using digital currencies as a means of social control.

Starting point is 00:04:58 This is exactly the China Digital Yuan approach that we don't want here. Or at least I can't speak for everyone else, but I don't want. NIDIG, the sponsor of this podcast, provides banks, corporate treasuries, pensions, and hedge funds with ironclad Bitcoin custody and white-gloved service. Learn more at nidig.com slash NLW. That's NYDIG.com slash NLW. Investor Adam Cochran watched the whole thing and summed up, the U.S. has two major stablecoin issuers who are insured, backed in cash and treasury assets, licensed and bonded in the states they serve, and still they are taking issue with that using boogeyman

Starting point is 00:05:44 arguments and seeking money restrictions. I can't imagine the line of thinking that goes into the last part of build a digital currency and control what legal things you can spend it on, especially from the same senators who denounce China's similar practices as totalitarian. These hearings are more and more becoming the same rehash of information, each side digging in and only engaging with the witnesses that their side called. Now let's flip though and ask, was there anything useful for Stablecoin advocates? One of the stronger arguments I've seen emerge from the last few hearings is the notion that

Starting point is 00:06:15 bank regulations are as strict as they are because of fractional reserve banking, that it's based on banks out reinvesting profits. The risk there is bank runs and banks not having the assets to give to the people who need them. If stable coins are a full reserve asset, there should be a different burden. There was also the global context take and the bright light, let's call it, of Senator Pat Toomey. Policy Director at Defy Education Fund Miller tweeted, Senator Toomey made an important and crystallizing point in Q&A during this morning's hearing. Regardless of what crypto policies the U.S. adopts, the world keeps turning and the internet is global.

Starting point is 00:06:48 Toomey asked, if Congress were to ban stable coins, do you think that people in other countries would develop stable coins? and then if anybody who has access to a computer in the internet would be able to access those coins? The answer is, of course, yes. And the Senator's logic applies to all cryptocurrencies and decentralized networks. Where the internet goes, so goes crypto, stablecoins, defy, etc. The question isn't whether the government can contain or ban crypto and defy innovation from reaching U.S. citizens, a misguided suggestion on its own merits. The question is how to maximize the national interest and protect consumers in a global internet-native financial system.

Starting point is 00:07:21 Now, the biggest concern overall I have about this whole thing is positions becoming calcified into a real partisan state. One of the things that was so encouraging in the House hearing was that it really wasn't a partisan affair, nor was it just a bunch of big bombastic statements that you could have predicted just by knowing whether someone was a Democrat or a Republican. The Senate hearing did give me pause, but at the end of the day, I don't think it mitigates how positive the House hearing was. Congress in so many ways literally and figuratively represents the next generation, so I for now am going to continue to be optimistic. Speaking of things to be optimistic about, remember how we had this big infrastructure fight over the summer, and really what the key was, was the definition of a broker and how that might

Starting point is 00:08:05 be abused or how that might be used to cut off legitimate actors in a system that don't custody assets going through it. There was a ton of work during that process to come up with a compromise, and this week the senators who are most involved in that work, work that unfortunately got cut off by procedural issues, came together to write a letter to the Treasury Department asking them to define what they're thinking around a broker was. So this was an open letter published by Senators Rob Portman, Mark Warner, Mike Crapo, Kirsten Cinema, Pat Toomey, and Cynthia Lummis. They wrote, some market participants have expressed concern that an overly broad interpretation of this provision's

Starting point is 00:08:41 definition of broker would capture certain individuals who are solely involved with validating distributed ledger transactions through mining, staking, or other methods, and entities solely providing software or hardware solutions enabling users to maintain custody of their own digital asset wallets. We urge the Department of Treasury to provide information or informal guidance as soon as possible, no later than the end of the current calendar year, regarding the definition of broker as discussed during the legislative process. We are also prepared to offer legislation to further clarify that intent.

Starting point is 00:09:10 Now, Jerry Brito from Coin Center did say that he didn't quite understand why there was such an urgency in terms of before the end of the current calendar year. He pointed out that there's an important open rulemaking process that gives the public a chance to give comment on whatever interpretation the Treasury proposes and that's super important to keep. But I still think it's very optimistic and encouraging to see this group of senators who were fighting to find a compromise before coming together to continue to push that through through new means. Now let's go over to Merry Old England. The Bank of England says that the growth of crypto could pose risks for financial stability. The BOE's financial stability report said, quote,

Starting point is 00:09:49 material growth in banks' exposures to unbacked crypto assets would expose them to financial, operational, and reputational risks. The bank called for, quote, enhanced regulatory and law enforcement frameworks, both domestically and at a global level. The joke that you saw a lot on crypto Twitter yesterday was one made by people like Crypto Cobain, who said, the Bank of England issuing a national financial stability warning because 0.1% of household wealth is in crypto, lull. But I think that the bigger takeaway and something that's definitely worth keeping an eye on is the statement from Andrew Bailey, the governor of the Bank of England, who said it probably

Starting point is 00:10:23 isn't a financial stability risk today, but it has all the makings of something that could become one. Keep an eye on that phrasing of financial stability risk. This is one of the biggest things that regulators are concerned with. And in fact, I think it's really a core of what the stable coin discussions are about. Could a run on stablecoin spread into wider financials? contagion because of who happens to be holding them, because of the opacity of hedge funds and family offices, that could be all of a sudden forced to margin call other assets and thus

Starting point is 00:10:53 this spreads. That type of discussion is very different than are bad people using this asset, for example. Lastly, today, though, let's end on something that isn't regulatory, but is in fact about Bitcoin. Nideig, sponsor of this show, has raised the largest venture capital round in crypto history. They raised a billion dollars valuing them at over a $7 billion valuation. The announcement was a chance for Nidig to reaffirm its focus on expanding Bitcoin everywhere. In an interview, they said,

Starting point is 00:11:23 Instead of trying to build a retail crypto exchange that was out competing for customers, we wanted to empower incumbents to be able to offer access to Bitcoin in a variety of ways. Starting next year, America is going to see Bitcoin showing up everywhere in all kinds of applications. What's more from the statement, this round is going to allow Nidig to increase what its customers can do with Bitcoin. Quote, further developed Nydig's institutional-grade Bitcoin platform using recent upgrades to the Bitcoin Protocol with capabilities such as Bitcoin and Lightning Payments, asset tokenization, and smart contracts. To me, I see this as sort of a rebuke to some of the emergent narratives that we've seen over the last few weeks, that

Starting point is 00:12:00 institutions are getting fearful that players are increasingly off of Bitcoin and focused on other crypto assets. Travis Kling wrote, pretty crazy, Nydig just raised $1 billion on a $7 billion valuation and they only deal in the most hated crypto asset in the ecosystem. Jacqueline Melanick from Blockworks wrote, Last month, Nidig's CMO told me the demand from companies looking to integrate Bitcoin is unlike anything he's ever seen before in this space. The question for us to watch for next year is how much it's going to matter to have Bitcoin integrated into everyone's bank accounts into all of the places that they already interact

Starting point is 00:12:36 with money and financial services. My bet, it's a fair bit. And to tomorrow, guys, be safe and take care of each other. Peace.

The Breakdown - The Senate’s Arguments Against Stablecoins

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