The Breakdown - ‘We Want to Make Sure America Is the Place for Innovation in FinTech’

Episode Date: January 27, 2023

On today’s episode, NLW examines recent interviews with Republican congressional leaders including Representatives Patrick McHenry, Tom Emmer, Warren Davidson and French Hill, around the state of crypto in Washington, D.C. NLW argues that the key plans and talking points are pretty clear when the interviews are looked at as a whole.  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 - Join the most important conversation in crypto and Web3 at Consensus 2023, happening April 26–28 in Austin, Texas. Come and immerse yourself in all that Web3, crypto, blockchain and the metaverse have to offer. Use code BREAKDOWN to get 15% off your pass. Visit consensus.coindesk.com. - “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. Music behind our sponsor today is “Swoon” by Falls. 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 produced and distributed by CoinDesk. What's going on, guys? It is Thursday, January 26th, and today we're doing a bit of a U.S. regulatory preview as relates the crypto industry. Before we dive into that, 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 in the show notes or go to bit.ly slash

breakdown pod. Well, listen, even if FTX hadn't righteously imploded, ripping to shreds a huge amount of goodwill in Washington, 2023 was already set up to be a big year for crypto regulation. Part of it was that it was just time. Part of it was that many of those processes were started last year, between Biden's executive order, numerous bills introduced in the House and Senate, including thoughtful, well-considered legislation like the Lummis-Jillibrand Responsible Financial Innovation Act, and some considerably less good legislation as well. Part of why this year was poised for regulation even before FTX was that the Republicans were taking power in the House, which meant that Representative Patrick McHenry would be moving from ranking member to chair of one of the most

important congressional committees when it comes to the industry, the House Financial Services Committee. While crypto has remained remarkably bipartisan compared to most other political issues, there's no denying that McHenry is one of the most important advocates for the space, and, importantly, the principles that underlie it. But, of course, given that FTCS did implode, and given that so many in Washington were standing in the blast radius due to their connections to SBF, it is doubly the case that crypto-regulation is on the 2023 agenda.

The need-jerk reaction has been to assume that because of FTX, things are going to be worse and harsher than they might otherwise have been. I don't think that that fear is unfounded. Certainly lots of people on the front lines in the crypto battle in Washington have some concerns. If you want to get a sense for that, go back and listen to my show with Kristen Smith from the Blockchain Association at the end of last year. At the same time, I find myself more optimistic than many here. I think that it is possible, even likely, for a big event like FTX to wash away a ton of goodwill,

especially when people are scared for their own necks because they also got duped by Sam. But what big events can't wash away is the years of progress in actually learning about the industry. being able to understand different pieces of it, being able to tell the difference between the different actors involved in a crypto transaction, wrapping their heads around non-custodial technology, etc. A lot of that work got done among staffers and legislators themselves over the past few years, and that doesn't just get wiped away. So what, if any, indicators do we have about crypto regulation this year? Well, in the last week or so, we've had numerous interviews from prominent house leaders around crypto, so today we're going to see what we can try to glean from

them. And let's start in the body that we just mentioned, the House Financial Services Committee. They recently announced a new subcommittee focused on exactly these issues. As per a press release from a couple weeks ago, the Subcommittee on Digital Assets, Financial Technology, and Inclusion will be led by Representative French Hill. The subcommittee's jurisdiction will cover, among other things, providing clear rules of the road among federal regulators for the digital asset ecosystem, developing policies that promote financial technology to reach underserved communities, and identifying best practices and policies that continue to strengthen diversity and inclusion in the digital asset ecosystem. Up till this week, that was about all we knew about this subcommittee, but just this morning,

Representative French Hill was on Squackbox with Joe Kernan. The first question that Joe asked was whether there was any room for bipartisanship on these issues. Congressman Hill said yes, there was. He said, quote, there are some Democrats who think anything associated with blockchain is just money laundering or a way to have bad behavior. On the other hand, there are some Republicans that think the future is decentralized finance and digital assets are critical. I think we bring them together because blockchain is an important innovation area, and we want that to be done here in the United States. We want a regulatory framework that's transparent for developers, investors, and consumers as people try to prove a use case. And finally, we want people to have

full transparency for that. I think that will bring Republicans and Democrats together. Joe's next question is about whether other industries might be loath to think of a future with decentralized finance. Congressman Hill says that's true, but look, blockchain right now is an emerging technology. There are businesses all over the country that are looking to how a blockchain or a distributed ledger can be useful to cut down on agency costs, and those don't always have to be completely disruptive. Hill quoted someone who told him the other day that a transaction using Bitcoin takes so long that my coffee is cold, and then went on to say, quote, right now this is not a technology that's ready for prime time in a real-time payments industry, but we want to make

sure America is the place for innovation in fintech, and blockchain is part of that fintech future. He'll close the interview saying, I think you'll see us explore a federal privacy law, you'll see us consider a stable coin bill. I think you'll see us explore what are the ramifications for the securities market and work with the Ag Committee on the commodities aspect of it. So a couple things to take away from this. One, Bitcoiners especially will notice there's a lot of blockchain as a technology talk versus Bitcoin as a mainstream finance disruptor talk. That will no doubt annoy people who are highly convinced of the specific importance of Bitcoin, which is totally reasonable, but I would also suggest that it's not the worst thing to have this

be the state of the discourse. In other words, to not make Bitcoin appear overly threatening. I'm also not convinced that this discourse doesn't represent a specific political choice versus some lack of understanding or a return to the blockchain-not-Bitcoin era. I think one can envision a scenario where advocates of the crypto industry in Congress think that emphasizing the emerging technology aspects of it over the financial disruption aspects of it is the right play for the moment. Of course, that could be wrong. I'm not privy to any specific information, but I wouldn't be surprised. Just to give you a sense of who you're dealing with, at the Libra hearing in 2019,

Patrick McHenry was the one who said that the world that Satoshi Nakamoto envisioned is an unstoppable force. So yeah, I would assume there's some understanding there. By the way, Bitcoin advocate Warren Davidson, who is responsible for the word coins being in the official congressional record, is the number two under French Hill on the committee. Speaking of people who get it, Tom Emmer has also risen in the ranks with the shift to Republican leadership of the House and is now majority whip.

For those of you unfamiliar with American politics, WIP means he manages the legislative program. He's one of five Republican House leaders alongside the Speaker of the House, the majority leader, the conference chairman, and the policy committee chairman. Emmer has been loud about his feelings post-FTX collapse, and SBF isn't the only one getting his ire. CoinDisc did an interview with him this week, and to put it simply, it is hot fire. Emmer himself retweeted it saying, crypto is here to stay. I will keep advocating for policies that advance crypto innovation and adoption in the United

States because crypto is more than a financial investment. It's about restoring liberty and choice to individuals. Now, in that interview, when he was asked why he was so bullish, quote, it's not about crypto, says Emmer, clarifying that it's about what crypto is facilitating. The movement towards Web 3 or what he prefers to call the ownership economy. Quote, that goes to everything I believe in, which is restoring the individual's rights to make his or her decision about what they want to do in the marketplace, or who they want to do it with, or how they want to get that done, and they don't have a middleman. Ultimately, this is about restoring liberty and choice to individuals. Jeff Wilser, who wrote the article, says,

These words are awfully abstract, so Emmer gives a quick hypothetical example. It's worth printing in full. Quote, you've got some aspiring entertainer who right now puts her content on a YouTube platform, and guess what? She derives no income from that whatsoever, no value unless she sells ads directly to that website. In the new world that we're going to, she can put her content out there as a non-fungible token, that others will pay something to experience or use and that will go directly to her. Maybe it's pennies, but you might have the next Aretha Franklin, who all of a sudden has a seven-figure number of views at a penny or two each, and you see where this goes. I think that's exciting. I think that's fair. And you don't need intermediaries for all these things.

Now, obviously, this is the part of the NFT story that fits firmly in the context of the big-picture power shifts that I always say the show is about. And Congressman Emmer is perfectly articulated what I'm talking about right here. Anyway, continuing, when CoinDesk asked him about the policy agenda, he said that he was going to let Congressman McHenry dictate that, but that he did have some questions himself as well. Quote, I think you're going to see a lot of bipartisan work to get to the bottom of why the SEC wasn't doing its job. What was Gary Gensler and company really doing? Emmer described Gensler as, quote, very arrogant and speaking from the mountaintop. And quote, then we find out that they're working with a fraudster that bilk the people out of billions of dollars? Republicans and Democrats are going to be

involved with that. Now, in a separate interview, Congressman Warren Davidson also had choice words for Gensler. Quote, you've got people that are engaging in overt pump and dump scams and getting away with it because the SEC is asleep at the wheel. Some seem to get a free pass and others seem to get their business models killed. No one's been happy with the job the SEC has done. Now, back to the Emmer interview, he definitely has strong feelings about previously proposed legislation. Referring to the Digital Commodity Consumer Protection Act, he said that bill is, quote, not the answer. When it comes to Senator Maxine Water's stablecoin bill, Emmer says that's a hard no. Quote, the United States government should not be in the digital dollar business.

The U.S. Treasury or the Federal Reserve, neither one of them should be in the banking business for private citizens. Now, you also get in this interview a preview of one of the arguments that Republicans are clearly making about their priorities in crypto regulation, that FTX wouldn't have happened if crypto activities were enabled in the U.S. This directly dovetails with some of Congressman French Hill statements, but goes even farther. FTX manipulated this thing from offshore, Emmer said, because of people like the senator from

Massachusetts, who will not get anything of substance done so that we can have this investment, this innovation, right here in this country. It's got to be in the Caribbean, for goodness sake, when stuff should have been here all along. Now, the other thing I want to extract from this interview and line up with something from Congressman Hill's appearance on Squawk Box is Emmer's discussion of private wallets. On private wallets in general, he said, I love them. I don't care if you're a Republican or a Democrat, you should never take those away. It's about the privacy. It's about the ability to self-direct. It's about the ability to take the government out of my life when I want the government out of my damn life.

Remember I mentioned before that Congressman Hill had said something about a federal privacy law. Based on these two statements, it seems like privacy could be an issue that might get a real look this time around. Join CoinDesk's Consensus 2023, the most important conversation in crypto and Web3, happening April 26 through 28th in Austin, Texas. Consensus is the industry's only event bringing together all sides of crypto, Web3, and the Metaverse. Immerse yourself in all that blockchain technology has to offer creators, builders, founders, founders, brand leaders, entrepreneurs, and more. Use code breakdown to get 15% off your paths. Visit consensus.coindex.com or check the link in the show notes.

Now, one final interview I want to add to this list today comes from Patrick McKenry himself. He was on the CBS News podcast, The Takeout, and alongside a much longer discussion around issues including the debt ceiling debate, crypto was a major topic. The first question from host Major Garrett was, what does FTX tell us about the viability of crypto? To which Patrick McHenry said that you have sociopaths and fraudsters attracted to new technology. Always is the case. But he then goes on and you see this argument about needing to bring this activity back to America appear again. McHenry says the reason why they were able to take advantage in this marketplace was our failure to actually provide clear rules of the road and a clear set of regulations that protects consumers and enables

innovation. The largest American exchange was domiciled in the Bahamas. You don't think of the Bahamas as some sort of marker as Hong Kong or London or New York. So you have to question, why in the hell were they there in the first place? We have to have clarity around our regulation. There's an enormous amount of economic potential that could be unleashed through this new technology. When you take out third-party intermediaries from an exchange, it can reduce the cost of those exchanges, and by reducing the cost, you can enable greater economic activity. Clear rules of the road in the United States can unlock this potential. In the interview, McHenry also echoed Emmer's critique of regulators saying that they didn't apply basic existing

rules, calling them asleep at the switch. He announced that there would be another FTX-focused hearing in February, and when asked further about Sam Bankman-Fried, McHenry said he is a pretender to the technology. He's a pretender to all the things that made him laudable in the media. He's proven himself to be a sociopath by his actions. He's proven himself to be untrustworthy by his actions. No word he uttered should be believed, period. Now, after that, host Major Garrett zoomed out again and asked how people trying to wrap their head around the value of crypto and blockchain should understand it. McHenry said, quote,

At the very beginning of all new technologies, there is a great question of utility. First with internal combustion engine, petrochemicals, oil, trains. All at the very inception had questions, what are you going to do with these things? What good will be produced? We have those same questions at the beginning of the Internet. What are people going to do with it? What is the economic potential here? We had award-winning economists that questioned the economic utility at the beginning of the Internet.

The Internet has unlocked so much potential in ways we couldn't have conceived of. We're in a similar position with blockchain technology and cryptocurrencies. We don't understand fully the potential here. So if you look across these interviews, I think the key things to sum up, first, Republican leadership definitely sets a different tone for a lot of these debates. Second, they're clearly aligned on the message around FTX. It was classic fraud. Crypto did attract it, but only because new technologies always do.

We shared the blame in D.C. because we didn't get our act together to make innovation work in the U.S. and finally, the unelected officials who could have stopped it didn't. Some version of that message came through in all of these interviews. A third note is that they're definitely positioning the technology as nascent but full of potential and one that they want here in America. The biggest theme from all of this is bringing innovation back to America. And I think it's clear that that's going to be the starting point for a lot of the discussions going forward. Anyways, guys, hope this was a useful look at what some of our elected officials are thinking

as relates, the crypto legislation slate for 2023. I appreciate you listening as always, and until tomorrow, be safe and take care of each other. Peace.