The Breakdown - What to Do About the Looming Disaster for Crypto in 6050I

Episode Date: November 6, 2021

This episode is sponsored by NYDIG. On this edition of “The Breakdown Weekly Recap,” NLW covers: SEC Chair Gensler’s recent comments on crypto enforcement The OCC concludes its crypto sprint Why the crypto community is so concerned about Infrastructure Bill amendment 6050I The vibe from NFT.NYC NYDIG, the institutional-grade platform for bitcoin, is making it possible for thousands of banks who have trusted relationships with hundreds of millions of customers, to offer Bitcoin. Learn more at NYDIG.com/NLW. 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 “The Breakdown” is written, produced by and features Nathaniel Whittemore aka NLW, with editing by Rob Mitchell, research by Scott Hill and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Dark Crazed Cap” by Isaac Joel. Image credit: smartboy10/DigitalVision Vectors/United Kingdom, modified by CoinDesk.

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 Saturday, November 6th, and that means it's time for the weekly recap. Let's start today with the latest bluster from the regulatory sphere. A Gary Gensler speech is making the rounds. The block is saying that it hints at enforcement actions against crypto firms. Here are a couple of the key quotes.

Sometimes people focus on labels. For example, we hear the term decentralized finance, defy, currency, or peer-to-peer lending. It can seem easy to take these words at face value. Make no mistake, regardless of the label or purported mission, we will be looking at the economic realities of a given product or arrangement to determine whether it complies with the securities laws. Some market participants may call this regulation by enforcement. I just call it enforcement.

Now, if you're wondering why so much enforcement talk, to be fair, this was given at the Securities Enforcement Forum. So, interestingly, though, Gensler's comments were also focused on other areas of the market. It wasn't just crypto. Bloomberg's headline was Wall Street Cop Gensler pledges big cases, faster investigations. And Forbes writes, Gensler, SEC will pursue misconduct everywhere, including matters that don't make headlines. But for those of us who are in the crypto industry, is there anything else worth noting around

this tough talk? Well, one thing that is worth pointing out is that Dan Berkovitz has joined the SEC from the CFTC. He's moving to the SEC's enforcement division, and he's perhaps best known for cleaning up the structure of the swaps market, which is what Michael Burry famously took advantage of to short mortgage bonds leading into the great financial crisis. Over the summer, Berkovitz came after DFI platform saying that they were possibly illegal, so that is certainly worth keeping an eye on. Also in the crypto world, many people took umbrage

with Gensler's comments around the line. So what do I mean? Well, let's turn to Antonio Juliano, the founder of DYDX, who wrote, Gensler today gave a speech where he said about crypto and defy, quote, if you're asking a lawyer, accountant, or advisor, if something is over the line, maybe it's time to step back from the line. First of all, I would challenge anyone who does not have a legal background to analyze the hundreds of pages of SEC guidance, years of speeches, and decades of case law with no counsel or even advice and have any idea at all where, quote, the line is.

Second, not over the line equals legal. If there is a legal business opportunity, there will rise up firms to capture it. If you don't, someone else will. That's called capitalism. If there is a business opportunity you're not sure is legal, you ask a lawyer. If it isn't, you modify the solution until it is legal. So it confuses me why the chair of the SEC is recommending those who have identified business opportunities they are very reasonably not sure if legal, not work.

with lawyers to ensure solutions fall within the bounds of the law. Gensler then goes on to say, think about the spirit of the law. It's about protecting investors. Well, I completely agree with that. As I've said, defy in many ways is exactly the long-term answer to regulators' key concerns. So I yet again conclude that it's unfortunate the narrative pushed by the SEC recently has shut crypto down to protect investors. Think about the spirit of the law. It's about protecting investors. We do. That's why we're building defy. Jerry Brito of Coin Center writes, I think this is good advice when there are bright line rules. Don't cross them. But what about when there are no such bright lines, only flexible balancing tests? And then there was investor Michael

Arrington who wrote, I think, something that better captures the spirit and tenor of the crypto conversation regarding these comments. What line? There's no fucking line. It's a blurry mess of bullshit. That's why you're driving us all totally crazy SEC. Now, there is one other interesting SEC thing happening. Grayscale, as you know, is trying to convert its grayscale Bitcoin trust into a Bitcoin Spot ETF. They have formally filed, and the first possible date for approval barring extensions is December 24th. The SEC has recently announced that they are formally seeking comments on this. Finally, Crypto Mom, Commissioner Hester Purse, mentioned again her support of spot products. At the Bloomberg Financial Innovation Summit, she said, I think by withholding from

investors exposure to spot products, we're actually not helping them. We're actually putting them in a worse position. Of course, we do these product approvals on a case-by-case basis, but I do think that it's not the best for investors not to give them access to this product. NIDIG sponsors this podcast, and they are the go-to Bitcoin company for banks and credit unions as well as corporate treasuries, fintechs, and hedge funds. Learn more at nidig.com slash NLW. That's nydig.com slash NLW. Now, moving over to another office.

The Office of the Comptroller of the Currency had initiated a crypto sprint earlier in the year to review all of the various things that their predecessors under Brian Brooks. books did while at the OCC, including making it much easier for banks to work with stablecoin issuers. Acting Comptroller Michael Sue said on Wednesday that the Sprint had concluded, saying, the content of these communications on the chartering decisions, interpretive letters, and the crypto sprint will be broadly aligned with the vision for the bank regulatory perimeter laid out here today. How should synthetic banking be defined? What constitutes universal activity for a crypto firm? Should certain crypto activities even be allowed to mix?

What adjustments to bank prudential standards and supervisory approaches are needed to ensure that such firms operate safely, soundly, and fairly. To answer these and other critical questions, meaningfully, federal and state regulators will need to engage technology and crypto firms, academics, community groups, banks, trade associations, and other stakeholders. Now, it's not exactly clear what Michael Sue is saying. It seems like we're going to have to really wait for more information, but I will note that they're not talking about banning. Again, you'll hear this as a theme a lot. There was a lot of talk earlier this year that the government was heading straight towards Banningsville, and that just isn't the case. Now, that's not to say that there won't be

fallout. It is clear that the acting comptroller wants comprehensive consolidated supervision. He says, quote, this would clearly differentiate safe and sound crypto firms from those that are regulated only partially and have a history of control lapses such as Binance and Tether. As I said, one more thing to expect some more info on soon, but let's stay in the realm of the crappy for just a minute. I did a whole show about a month ago about this crypto provision in the infrastructure bill that could be a total disaster. With a vote on the bill looming, it's getting more noisy. This is the amendment to Section 6050I. Matt Lysing writes, if you're in crypto, you should be paying attention to this story. There's a chance any digital asset receipt would require you to report

to the U.S. government, the name, address, social security number, and TID of your counterparty in an egregious overreach. Patrick Dugan gives even more details, writing, reading up on IRS provisions 6050I inserted into the infrastructure bill set to pass in the House on Friday. In July, we made a huge fuss about the broker thing. This is 100x worse. Criminal felonies including all individuals and all tokens all mixing all custody. Taproot mixing, you're hosed. You become a felon for using wasabi. Mining pools that aren't doxed, felony. NFTs above 10K, you go to jail. Programming payments and installments to keep sums below 10K, also a felony. Writing software, even some JavaScript app logic in a wallet to assist, jail. Wake up, folks, this is not a drill. I only saw one person who is mutually raising alarm bells for this for months.

Now Laura Shin covered it and I read the whole thing. Wow. We're two days away from losing everything. US persons will be completely cut out, residents and citizens. So in the only way a person born in the USA will be able to do anything in any scale with these technologies without K-YCing everyone or becoming a felon will be to A, leave, and B, operate with a non-U.S entity and ideally non-U.S. Then we'll have to globally adopt some kind of decentralized minimal KYC with encrypted blinded POR, no home address docs, but can confirm not U.S. And we just turn our backs to U.S. persons. The rest of the world has a spectrum of more financial freedoms and regulation requirements. This is the future. The way to avoid this scenario where U.S. persons are living under harsh capital

controls is to raise a ruckus like we did in July, remove 6050I from the infrastructure bill, and we have less than two days. We need to act today to prevent this bill from passing unchanged tomorrow. Neresh from Coin Center writes, we're on it. If it becomes law, big if because of larger political issues, we would likely challenge it in court. Jake Chavinsky writes, the infrastructure your bill is heading for a vote in the House. Yes, the crypto provisions are just as bad as they were months ago. Yes, the impact of Section 6050I has been under explored. No, you don't need to call your reps. The political reality is, it's out of our hands now. Importantly, nothing will happen right away. The crypto provisions don't go into effect until 2024 for fiscal year 20203 reporting.

We can try to get them repealed or amended before then. They also need rulemaking from Treasury to define their scope. We will be active in that process. I'm as disappointed as anyone, but strategically, It's crucial we understand when to fight and when to keep our powder dry. We made a big impact in D.C. during the Senate vote. That was our shot and we made it count. The broader politics have taken over now. There's a long road ahead, including 2022 midterm elections that could significantly reshape Congress and its attitude on crypto.

So don't get me wrong, we shall fight. We shall fight in Congress. We shall fight in the courts. We shall fight in the fields and in the streets. But there's no fight to be had today that's worth spending the ammunition. Regardless, I'm as optimistic as ever that ultimately good policy will prevail. We have the best people on our side. For now, keep calm and carry on.

So maybe let's try to round this out with some better news and more fun things. The Bitcoin mayor race continues to heat up. As I've told you about throughout shows this week, first we had Eric Adams, the new mayor of New York, who as early as July was talking about why he wanted to make the city a center for Bitcoin, and then reiterated that in the days after his election, even saying that he wanted to compete with Miami and Mayor Francis Suarez. Well, when Mayor Suarez said that he was going to take his next paycheck in Bitcoin,

Eric Adams tripled up, tweeting yesterday, In New York, we always go big, so I'm going to take my first three paychecks in Bitcoin when I become mayor. NYC is going to be the center of the cryptocurrency industry and other fast-growing innovative industries. Just wait. Now, the biggest thing I want to note about this is that he must be getting positive response to his comments, or otherwise, why would he keep engaging? There is another contender in the Bitcoin mayor race, though. Mayor Scott Conger of Jackson, Tennessee, tweets,

While state law prohibits the city of Jackson from paying me in Bitcoin, I'll follow the lead of Francis Suarez and Eric Adams and instantly convert my next paycheck to Bitcoin. Of course, this isn't Congress' first rodeo with Bitcoin Twitter. He has long stated that he wants Jackson to be a Bitcoin-friendly city. In July, for example, he was looking into making property tax payments in Bitcoin. That month, he also tweeted, why do we accept inflation? Why don't we demand more from our federal government? 6.3% in two years.

172.8% in my lifetime. Every year our dollar is worth less. There is no rebound. There is only one fix to this. Hashtag Bitcoin. Finally, I want to at least briefly mention nfti.n. There was so much happening around this week-long event. You could see even through Twitter so much of the energy that was going on there. You had collections being displayed in Times Square on 60-foot billboards and millions of discussions and panels and parties. and I just wanted to close with a little thread from Bat Soup Yum, who's an NFT collector and who is there who writes, A Quick Thought on NFT and NYC as I head out. I've never seen energy like this and I'm not prone to hyperbole.

It felt like connection between creator and collector, which has always been there, stepped up a level because the friction in between has been disrupted. When was the last time a traditional collector had a drink with the artist in real life, or a hug and a high five, or got to paint with them at their studio, or just shared a laugh about 420, 69, dick butts,

or any of the other 10,000 ridiculous things we laugh about together every day. NFTs did this, blockchain did this. It was always out there waiting to happen. We just needed a spark to get it burning. These markets are volatile. It's likely a lot of prices get slaughtered on a number of projects. But what I saw, IRL, these past few days told me one thing. No matter what happens to the numbers, this community and the relationships we're building

are here forever. One final thing. If you didn't make it, don't worry. You're already a part of this community, and I can assure you it's in very good hands. I hope you guys are having a great weekend. And until tomorrow, be safe and take care of each other. Peace.