The Breakdown - The Stablecoin TRUST Act Could Enshrine Financial Privacy

Starting point is 00:00:04 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 nexus.io, Arculus, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Thursday, April 7th, and today we are talking about the new stablecoin legislation from one of crypto's most staunch allies in the Senate. Before we get into that, however, if you are enjoying the breakdown, please go subscribe, give it a rating, give it a review, or if you want to dig deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.org slash breakdown pod. Also, a disclosure as always, in addition to them being a sponsor of the show,

Starting point is 00:00:52 I also work with FTX. Now, if you can't tell from my voice, I have finally succumbed to the preschool sickness that has been flying around my family. So, apologies in advance for the throatiness, but we still have a podcast to do. And this has been quite a positive regulatory week. For those of you who missed my show on either Monday or Tuesday, I've lost all track of time. We got really surprising news, frankly, out of the UK, where a chancellor of the exchequer, Rishi Sunak, announced that Great Britain was looking to become a global crypto asset hub. He announced a set of proposals, including a review of tax approaches to defy loans, an NFT mint from the Royal Treasury, and the recognition of stable coins as a payment

Starting point is 00:01:39 option, which, as you'll see, will be relevant to our conversation today. Now, this stands kind of in contrast to what has been a contentious relationship between crypto companies and the UK's Financial Conduct Authority. Now, of course, as you've seen from the U.S., different parts of a government can have very different attitudes towards crypto, but I think it still has to be seen as overall a pretty positive step for the UK crypto industry. Hopping back over the pond to the U.S., yesterday, one of our most staunch and stalwart allies in the Senate, Senator Pat Toomey, introduced the Stablecoin Transparency of Reserves and Uniform Safe Transactions Act or the Stable Coin Trust Act.

Starting point is 00:02:21 And man, folks in the Senate and Congress just love their acronyms, I got to say. Either way, this bill is a discussion draft of a bill. So it has not been formally introduced as legislation. The idea here is to get commentary, to build public sentiment, to build support among colleagues and allies. And what the bill does is it defines a quote-unquote payment stablecoin. It authorizes the Office of the Comptroller of the Currency or OCC to create a new license that would be specific to stablecoin issuers. So not just an old category of license, but something actually new. It would allow insured depository banks to issue these quote-unquote payment stable coins,

Starting point is 00:03:03 and basically it would just try to make regulation and oversight of the stablecoin space more clear. Now, the definition of a payment stable coin in this case is stable coins that are issued by a central entity that are pegged to and can be converted into a fiat currency and are, quote, designed to be used widely as a medium of exchange. Another key piece of quote-unquote payment stablecoins is that they do not confer interest. Now, as part of the bill, stablecoin issuers would be able to choose between this new OCC license, or they could use existing licenses like state money transmitter licenses or traditional bank charters. Regardless of which of those paths they chose, stable coin issuers would be subject to specify a number of details, including redemption policies,

Starting point is 00:03:49 disclosure on what actually backs the stable coins, and regular reserve assets. attestations. It's important to note here that these things are not controversial in the crypto industry. I think that almost everyone feels that regular reserve attestations that are verifiable and audited by third parties would be a huge boon to the space. Some stable coin issuers have voluntary versions of that now. Some, in the case of tether, are forced based on previous court settlements, but in any case, having the information about what's actually backing a stable coin is non-controversial. The goal for Toomey is to just clear out this regulatory space and actually allow stable coins to be as innovative and powerful a tool as they can be. He said, quote, they have the potential,

Starting point is 00:04:32 among other things, to speed up payments and automate transactions. The proposed regulatory framework I'm releasing today will allow this crypto innovation to continue flourishing while protecting consumers and minimizing potential risks from stable coins to the financial system. I look forward to receiving feedback on this legislation from my colleagues and stakeholders as Congress continues its work on stablecoin regulation. I think there is a growing awareness that this category is not going away. He also added that he wanted to make sure to clarify that payment stable coins are not securities. Now, sadly, Toomey is actually retiring this year. His term ends and he has announced that he will not seek re-election. That means he has about eight months to get this done, but it does seem like that's

Starting point is 00:05:15 actually his intention. I noted when we discussed Biden's executive order that one of the likely outcomes of the Biden administration's increased focus on crypto would be Congress and the Senate asserting their own authority as it relates to these new spaces. I think there's a strong feeling in Congress and the Senate that when it comes to designing new regulatory regimes for innovative assets, that's something that should be done by elected officials, not appointed officers in an administration. This To Me proposal is the latest in what I think will be a number of different proposals around this space. Looking for ways to step up your crypto game, then go with Nexo.

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Starting point is 00:07:30 A couple interesting commentaries on this from the crypto space. The always sharp Maya Zahavi says, wow, Senator Toomey put forth legislation that allows reserved back stablecoins to gain OCC licenses, bank charter or money transmitter, and let banks issue stablecoins for payments. This puts stablecoin issuers on par with banks. What really stands out is reversing the burden of accountability, in the sense that the regulators have to detail the reasons for denying a license, a real 180 in terms of how U.S. regulators have slowed to a halt any attempt for crypto companies to work with them. Note, this legislation does limit how stablecoins can interact on-chain or limit redemptions

Starting point is 00:08:09 based on-chain transactions. That essentially leaves the status quo of defy composability as is and sets the bar on stablecoin issuers' disclosures and audits. The OCC gets the mandate to decide on the minimum capital requirements, liquidity requirements, and governance and risk management. The privacy part is what makes me so bullish on how the stablecoin proposal is the first that allows crypto to flourish without rupturing defy protocols. Treasury can't collect data on stablecoin transactions without a warrant or voluntary disclosures.

Starting point is 00:08:37 Now, going more into detail on that privacy side, that was where other people in the crypto industry tended to focus as well. Peter Van Valkenberg, the director of research at Coin Center, went in depth. I'm going to read Peter's thread, but first I'm going to read the relevant section of the bill. Section 8. Privacy protections for convertible virtual currencies and payment stable coin users. The Secretary of the Treasury may not collect or mandate the collection of non-public information about convertible virtual currency transactions unless the information is one, particularly described in a search warrant, granted by a judge upon a finding of probable cause, that one

Starting point is 00:09:11 or more of the participants to the transaction committed or is committing a crime, or two, voluntarily provided by a customer or a financial institution, business, or other third party, and held for a legitimate business purpose by that financial institution, business or third party. Peter Van Valkenberg writes, Senator Toomey has shared the Stablecoin Trust Act, a discussion draft mostly about stablecoins, but it also has important privacy protections for crypto users broadly. It puts real limits on warrantless surveillance by narrowing what info can be collected from third parties. Last summer, we fought a provision in the infrastructure bill that damaged the privacy of crypto users by expanding the broker definition, who needs to report information about transactions to the IRS, and Crypto-505OI reports

Starting point is 00:09:50 on business transactions over $10,000. The winter before, we fought and successfully delayed a rushed proposal from the outgoing Trump administration to mandate that exchanges collect information about persons who are not their customers, who hold crypto-add addresses and wallets they control directly. The Stablecoin Trust Act would stop these encroachments, constrain the Treasury from collecting any non-public information unless they get a search warrant or collect only information voluntarily provided to an exchange by a customer and for a legitimate business purpose. If, quote, voluntarily provided for a legitimate business purpose sounds familiar to you, that's because it's the

Starting point is 00:10:23 constitutional standard articulated by the court in Carpenter describing limited circumstances where warrantless searches of customer data are okay. It's the standard we've advocated, must also limit warrantless data collection at crypto exchanges. If exchanges must collect information about non-customers, that information is, by definition, not voluntarily provided for a legitimate business purpose. So, under a correct interpretation of the Fourth Amendment, the rushed Trump rulemaking can't constitutionally require those reports about non-customers. The Stable Coin Trust Act would make that clear in legislation avoiding a lengthy constitutional challenge down the road. Similarly, if the broker definition in last summer's infrastructure bill was extended to cover minors and developers or other non-custodial entities,

Starting point is 00:11:02 then the personal info sought would not be, quote, voluntarily provided for a legitimate purpose because these entities don't have customers. We're very proud to have worked with Senator Toomey on these privacy issues. It's great to have a champion in the Senate working on legislation that honors and buttresses are constitutional rights to use Bitcoin safely, privately, and peer-to-peer. So as I mentioned, obviously, this is a discussion draft, and who knows what will happen to those privacy provisions if indeed this ever comes to an actual vote. But at least we're now having the conversation. I think that's a positive direction for the space as a whole. I'm going to do just a few additional news bulletins now, and then we will wrap.

Starting point is 00:11:37 Some interesting discussion yesterday from Treasury Secretary Janet Yellen. She testified before the House Financial Services Committee yesterday in a hearing called the State of the International Financial System. She was asked about crypto sanctions. Nidia Velasquez, a Democrat from New York, said many of us on this committee are concerned about a potential use of cryptocurrencies and other digital assets in order to avoid sanctions. How is the Treasury Department carrying out this pledge? Yellen's response was, we are aware of the possibility clearly that crypto could be used as a tool to evade sanctions, and we're carefully monitoring to make sure that doesn't occur. But I would say we have a good deal of authority in this area, and we are using it and will use it. It's harder on a large-scale

Starting point is 00:12:15 for an economy to actually use crypto to evade sanctions. Large-scale transactions would become apparent by those who regularly examine the blockchain. That was the main quote, but as Colin Post from the block, said, quote, for context, a lot of Congress folks, mostly Democrats, are really trying to portray crypto as a focal point for Russian sanction evasion. It's up repeatedly in this hearing, but Yellen is flat denying the need for more statutory authority over crypto. I've noted before this weirdness of sanctions forcing the Treasury Department, who has not historically been our greatest ally, basically saying, get off our backs. Russians just aren't using this for sanctions evasion. So really interesting to observe that conversation continuing to play out.

Starting point is 00:12:55 Finally, one more from the SEC. The SEC has approved a new Bitcoin futures ETF. This is from Tukrium and NYSE ARCA. And the thing that's notable about this is that they filed the application under the Securities Exchange Act of 1934. So far, the other approved Bitcoin Futures ETFs were filed under the Investment Company Act of 1940, which follows a different regulatory pathway. Eric Belcunis, the senior ETF analyst for Bloomberg, explains why that's significant. Just in, SEC approves Tukrium Bitcoin Futures ETF, notable because it was filed under the 33 Act, which Gary Gensler has said doesn't have enough investor protections versus 40 Act.

Starting point is 00:13:35 So possible this is a good sign for spot ETF approval, although we still think exchanges need regulations before he will greenlight. So basically, the fact that this was approved under a regulatory regime that in the past, SEC Chair Gary Gensler has said was insufficient when it came to investor protections has a lot of people speculating that a spot ETF approval is next. I think trying to read the tea leaves of regulatory approvals is mostly a fun game for the Twitterati. But if you need something to do today, there are worse. things, I suppose, than that speculation. For now, guys, I'm going to wrap it a little early.

Starting point is 00:14:10 I appreciate you listening. And I also appreciate my sponsors, nexus.io, Arculus, and FtX for supporting the show. Until tomorrow, be safe and take care of each other. Peace. Hey, breakdown listeners, come join CoinDesk's Consensus 2020, the festival for the decentralized world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain, crypto ecosystems, Web3, and the Metaverse,

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The Breakdown - The Stablecoin TRUST Act Could Enshrine Financial Privacy

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