The Breakdown - US Senators Say BTC and ETH Are Commodities

Episode Date: August 4, 2022

This episode is sponsored by Nexo.io, Chainalysis and FTX US.   Another day, another bipartisan crypto bill. On today’s episode, NLW covers the latest in a string of legislation that shows that Congress and the Senate are taking their role in determining how crypto is to be regulated seriously. He also covers the news that Michael Saylor is stepping down from the CEO role at MicroStrategy.  - Nexo is a security-first platform where you can buy, exchange and borrow against your crypto. The company safeguards your crypto by relying on five key fundamentals including real-time auditing and insurance on custodial assets. Learn more at nexo.io. - Chainalysis is the blockchain data platform. We provide data, software, services and research to government agencies, exchanges, financial institutions and insurance and cybersecurity companies. Our data powers investigation, compliance and market intelligence software that has been used to solve some of the world’s most high-profile criminal cases. For more information, visit www.chainalysis.com. - FTX US is the safe, regulated way to buy Bitcoin, ETH, SOL and other digital assets. Trade crypto with up to 85% lower fees than top competitors and trade ETH and SOL NFTs with no gas fees and subsidized gas on withdrawals. Sign up at FTX.US today. - “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell and research by Scott Hill. Jared Schwartz is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsors is “The Now” by Aaron Sprinkle. Image credit: Anna Moneymaker/Getty Images, modified by CoinDesk. Join the discussion at discord.gg/VrKRrfKCz8.

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.com, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Wednesday, August 3rd, and today we are talking about how U.S. senators are standing up to say that Bitcoin and Eath are commodities. Before we get into that, a quick note. There are two ways to listen to the Breakdown podcast. You can find us on the Coin Desk Podcast Network feed, which features the breakdown as well as other great Coin Desk shows,

and comes out in the afternoon. Or you can listen on the breakdown-only feed, which comes out a few hours later in the evening. Wherever you are listening, I so appreciate everyone who has taken the time to leave a rating or a review. It makes a huge difference in terms of new people discovering the show. So thank you, thank you.

I really do appreciate it. Lastly, a disclosure. as always. In addition to them being a sponsor of the show, I also work with FTX. So there is a lot going on in markets right now. I mean, we appear to need to reset the days without incident clock back to zero as an exploit that has been draining Solana and seemingly some ETH wallets is working its way through the ecosystem. It's definitely a topic that's big enough for an entire show, but we're still in a little bit of the fog of the hack. And while we're starting to get some amount of additional clarity, the time that it took to really understand what was going on, has

made this somewhat different and to many somewhat scarier than previous exploits. Let's also check in on Nancy's big trip to Taiwan before we move to today's topics. The narrative has definitely shifted, at least in American press. From a Bloomberg piece this morning, quote, in roughly 24 hours, Chinese officials and propagandists went from warning of a powder keg to pleading for patience as Beijing struggled to articulate a cohesive response to Nancy Pelosi's landmark trip to Taiwan. At a briefing on Wednesday afternoon, a foreign ministry spokesperson asked the public to give the government more time to follow through on threats to punish the U.S. and Taiwan, saying,

we will do what we have said, so please have some patience about that. Now, that's said, China is doing military drills around Taiwan that, quote, amount to China's most provocative actions in decades, and which also, quote, threatened to disrupt shipping and airline routes in Taiwan, one of the world's most crucial suppliers of computer trips. Indeed, this is the angle that other papers like the Wall Street Journal have chosen. Their piece this morning was titled as Pelosi leaves Taiwan, China's military looms larger. Now, the reason that these military drills are relevant isn't just the pomp and circumstance of them, but the way they potentially disrupt one of the world's most important commercial areas.

Almost half of the global container fleet and a full 88% of the world's largest ships by tonnage pass by Taiwan each year. But to today's actual content, Twitter absolutely lit up yesterday, when it was announced that Michael Saylor would be stepping down, from the CEO role of Micro Strategy. In the company's earnings report released on Tuesday, Saylor announced that he would be transitioning to exclusively performing his existing role as executive chairman. He hands the CEO duties to a seven-year veteran of the company who was previously

Micro Strategies president. Saylor's statement was, quote, I believe that splitting the roles of chairman and CEO will enable us to better pursue our two corporate strategies of acquiring and holding Bitcoin and growing our enterprise analytics software business. As executive chairman, I will be able to focus more on our Bitcoin. acquisition strategy and related Bitcoin advocacy initiatives, while Fong Lee will be empowered as CEO to manage overall corporate operations. The incoming CEO says that he doesn't anticipate

any major changes in the company's strategy, and that he has been aligned with Saylor on the enterprise and Bitcoin Treasury strategy. So obviously the big question is, is this actually about separating these two sides of the business, basically just a smoothing of different lines, as sort of corporate divide and conquer, or does it reflect some bigger trouble? Certainly from a balance sheet perspective, Micro Strategy has been under pressure this year. They announced on their Q1 earnings call that their Bitcoin strategy had an average cost basis of $30,700. They also have a Bitcoin backed loan from Silvergate, which would need additional collateral pledged if the price of Bitcoin dropped below $21,000. In their quarter two earnings report, Micro Strategy reported an

impairment charge of $917.8 million on their Bitcoin holdings. The company also reported an operating loss of almost $100 million across the rest of the company, meaning that they had a $1 billion operating loss for the quarter. They currently hold close to 130,000 Bitcoin with a value of around $3 billion. Those Bitcoin were acquired for $4 billion in total. While micro strategy initially fell in after-hours trading on Tuesday night, it opened up about 7% this morning. So how are people interpreting this? Well, first of all, there's a sense that this sort of announcement of a founder leaving the CEO role and focusing on being a board chair is usually tantamount to soft retirement. Concoda writes, the change from CEO to executive chairman usually means the CEO is parting ways with the company, but wants to create a smooth transition of leadership.

Investor Adam Cochran writes, whoa, sailor announcing stepping down from CEO role of micro strategy. Yeah, I'm going to call PR BS on that with how sudden this announcement is. Feels like pressure to refocus the main business given the downtrend recently. For what it's worth, having been in PR in the past, this is exactly how I would recommend a company handle the firing or replacement of a founder who is in the public eye. give them a meaningless role, let them say they are focusing on element X, and then let it fade. When I did a poll, obviously a highly scientific measure of sentiment, 41.9% of the few hundred voters said that they thought that this was about exactly what micro-strategy said it was about, a better division of labor, versus 58.1% who said they

thought it was a sign of trouble. Still, I think you have to look at the specifics in this situation, which is that Saylor retains basically total control over the company. Zero X Sisyphus writes, Michael Saylor has about 16-ish-percent economic ownership over micro-strategy, but 68% voting ownership due to a two-share class structure. His class B shares have 10 times the voting power. Even if he isn't CEO, he still controls vote-based outcomes. There are no circumstances under which Sailor would be forced to convert these Class B shares to Class A. He could elect to transfer them to a third party or elect to convert them to the worst Class B shares,

but both are quite stupid ideas. So I think it's fairly possible and more possible than it would normally be in these situations, that Sailor really does just want to focus on that side of things. It's completely reasonable to not want the day-to-day of running an enterprise software company after 33 years of doing the day-to-day of running an enterprise software company. Now, one thing to note as we narrative watch here, it seems almost for sure that we will now see a massive surge in micro-strategy is going to dump their Bitcoin fud. If they were to sell, it would be as quietly and discreetly as possible, and we wouldn't hear until quarter three earnings, which is, of course, what makes that fud all the more enticing to spread.

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visibility and maximize your potential with the leading blockchain data platform by visiting us now at chainalysis.com slash coin desk. The breakdown is sponsored by FTXUS. FtXUS is the safe, regulated way to buy and sell Bitcoin and other digital assets with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FDXUS is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTX, you pay no gas fees. Download the FTX app today and use referral code breakdown to support the show. Our second big topic for today, though, goes into the regulatory sphere.

This has been one of the major themes of this year, and specifically what people are really watching is the approaching endgame of U.S. regulation. One of the sub-themes of that has been the tension between, on the one hand, a serious jockeying for position between specific agencies, notably the SEC and the CFTC, and on the other side, an attempt to have an actually coherent policy that spreads across the full breadth of the industry. On the jockeying side, the battle between the SEC and the CFTC has been getting more pronounced of late. For example, a CFTC commissioner taking the extremely unusual step of releasing a fiery indictment of a recent SEC action as, quote, regulation by enforcement.

When it comes to the coherent policy side, this has come from the Biden White House, in other words, the executive order earlier in the year that directed interagency groups to make a bunch of recommendations. But also, as or more importantly, Congress has been recognizing that it's really their job to make these calls, not the agencies. This is a new industry, and that sort of makes it elected officials' job to figure out how to fit this into a regulatory framework at a high level, finding the balance between objectives that could theoretically lead in different directions, such as consumer protections on the one hand and the encouragement of innovation on the other. We've seen that role of Congress in the Senate come to the four in the bipartisan Senator Lummis and Senator Gillibrand Responsible Financial Innovation Act. And as of today, another piece of legislation has come out with some similar themes. The Senate Agriculture Committee,

which oversees the CFTC, has introduced a new bill that would add some clarity. First, it would create a definition for digital commodities, which would include Bitcoin and Ether, but not necessarily other assets that might be considered securities. The CFTC would then be given authority over these digital commodities and, by extension, introduce new categories of registration for things like digital commodities brokers, digital commodity custodians, digital commodity dealers, etc. Basically, this would mean that the infrastructure companies in crypto exchanges, custodians, etc, had to formally register with the CFTC. It would also start to put some specific rules around them. From the summary document, digital commodity trading facilities

must only permit transactions in digital commodities that are not readily susceptible to manipulation. provide a competitive, open and efficient market for executing transactions, monitor digital commodity trading and protect market participants from abuse, and capture and publish trading information in a timely manner. It also authorizes the CFTC to determine rules around things like leverage trading. And one really big thing from a practical standpoint is that it would preempt registration requirements from other state laws. Right now, exchanges trying to comply have to register state by state,

which is obviously a massive logistical and legal burden. Now, like all of these recent bills, this bill was sponsored by a bipartisan group, including Debbie Stabnow, a Democrat from Michigan, John Boosman, a Republican from Arkansas, Corey Booker, a Democrat from New Jersey, and John Thune, a Republican from South Dakota. So what has been the response? From exchanges, one of the groups who would be most impacted by this, we have comments from Sam Bankman Free, the CEO of FTX. He writes, I'm really excited to see Senator Stave Now and John Boosman introduce a strong bill

to bring consumer protection and federal oversight to crypto. The bill, co-sponsored with Corey Booker and John Thune, is complementary with the House bill and the previously released Gillibrand-Lumice Bill. It would provide clear federal oversight to digital asset commodity markets. We would find it constructive and healthy to register under such a regime, finally bringing comprehensive consumer protections and oversight to spot crypto commodity markets in the U.S. It would help strengthen liquidity while fighting against bad actors in the ecosystem. It's also really inspiring to see our senators working in a bipartisan, constructive way to help strengthen America's regulatory frameworks. They and our regulators have developed the strong understanding of the digital asset

ecosystem and how to effectively regulate the space. Coin Center also wrote a response, with the TLDR statement being, the Digital Commodities Consumer Protection Act is promising with room for improvement. Peter Van Valkenberg from Coin Center said, we're grateful the authors have committed to a sensible federal supervisory scheme for crypto exchanges. We've been calling for a federal alternative to state money transmission licensing since 2018. They go on to say that this comes with three big policy improvements. Quote, such a regime would accomplish many objectives, including one, simplifying the patchwork of state money transmission regulations for registered businesses, two, ensuring uniform consumer protections for customers of CFTC supervised exchanges

irrespective of their state of residence, and three, lessening pressure on the SEC to act to regulate exchanges trading non-securities. Now, what about what they say is the less good? Again, from Van Valkenberg. Senate bill creates a mandatory registration requirement. This means we need to be sure that the definition of who must register is appropriately narrowed to cover only persons creating consumer risk. Senate bill also broadens the list of registered entities from exchanges to brokers, dealers, custodians, and trading platforms. These definitions have carve-outs for miners and stakers, but we need to be sure software developers, node operators, and individual traders are also left out. A mandatory registration regime should not apply to persons who are merely writing or publishing software,

relaying or validating transactions on a permissionless network, or using that network for personal purposes. Mandatory registration of these activities would not only crush the innovative nature of these technologies with unnecessarily burdensome requirements, it would also violate our constitutional rights to speech and privacy. Fortunately, the bill's authors are sensitive to these concerns and eager to work with us to get this right. Now what about other folks who had problems with it? Gabriel Shapiro wrote, sorry, but any bill that taxes users to fund regulators and requires ESG's surveillance of people's race, gender, or an ethnicity is not a good bill. He points to two specific provisions. From the summary, the bill authorizes the CFTC to impose user fees

on digital commodity platforms to fully fund its oversight of the digital commodity market, and directs the CFTC to examine racial, ethnic, and gender demographics of customers participating in digital commodity markets and use that information to inform its rulemaking and provide outreach to customers. Still, by and large, the community response so far is enthusiastic. Kristen Smith, the executive director of the blockchain association, sums up the state of play thusly. Crypto, she writes, is here for good. This year tested us. Macro conditions, project failures. But the industry is building and will emerge stronger than ever. As I look ahead to 2023, I'm optimistic will finally see a much-needed legislation for crypto. Here are five reasons why.

First, there is consensus among policymakers, investors, and industry that a bill is needed. Most federal and state agencies have done their best to regulate crypto using existing authority. But there are gaps, notably with stable coins and spot markets that require new law. Second, recent bills are bipartisan. Bipartisan issues are rare. We'll get a balanced bill with both sides involved. Third, lawmakers agree that CFTC is the preferred regulator of crypto spot markets. All three efforts I've mentioned have this in common. Fourth, the policymaker education gap is closing. The Biden executive order on digital assets posed thoughtful policy questions that federal agencies will respond to in reports to be released this fall. This will help educate those on Capitol Hill who hold the pen.

Fifth, the crypto industry is ready to be a constructive partner. In the past year, the industry has made a real investment in D.C. The number of policy professionals thinking about these issues has skyrocketed. We're ready to have a seat at the table. New legislation isn't guaranteed. I handicap odds of a bill becoming law at about 40% by the end of 2023 and 60% by the end of 2024. This may sound like a coin toss, but this is high. 99% of bills don't make it past the introduction phase. This is the best chance crypto has had. The moment for legislation is upon us.

Thank you to all the members of Congress who are taking this need for sound regulation seriously. So there you have it, another in the string of positive movements as relates to crypto regulation in the U.S. For now, I want to say thanks again to my sponsors, nex0.com.com, chain aliasis and FtX. And thanks to you guys for listening. I'll be safe and take care of each other. Peace.