The Breakdown - What We Learned From Congress' ‘Demystifying Crypto’ Hearing

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 Thursday, November 18th, and today we are discussing what we learned from Congress's demystifying crypto hearing. So last week, a bunch of hay was made about Congress and the Senate. holding this hearing called demystifying crypto. There were many who pointed out that it was actually quite a good panel of expert witnesses and that it seemed that the tone might be different. My critique at the time was that broadly, yes, it was a good panel, but there was no one there

Starting point is 00:00:54 who represented a builder or an investor, as much as I love CoinCenter and appreciate their constant presence at this type of thing. It's very hard, I think, for the U.S. government to get a full picture of the crypto industry when you're only having academics and advocacy groups as part of the dialogue. But what we're here to talk about is what actually happened. And there was, you might say, shockingly little commentary on Twitter about this, which either means, one, no one was paying attention, or two, that there wasn't a lot of controversy. And either way, that tells us something about how the regulatory conversation in the U.S. is changing. Now, this was an event held by the Joint Economic Committee.

Starting point is 00:01:35 The Joint Economic Committee actually includes both members from Congress and the Senate. The chairman is Democrat Don Beyer, whose name you might recognize as the person who introduced the Digital Asset Market Structure and Investor Protection Act over the summer. Now, at the time that Congressman Beyer introduced that legislation, it was notable because he hadn't really prominently figured in the crypto conversation up to that point. And there were many, including other members of Congress, who speculated. that it was actually a proxy for the Treasury Department, something that Don Beyer has denied. Now, the ranking member on the Republican side for the Joint Economic Committee is Senator Mike Lee

Starting point is 00:02:11 of Utah. And I would say, as I reviewed this whole hearing, that there are two high-level notable things. The first is that part of the reason there wasn't any real chatter about this on Twitter, etc., is that there really weren't big bombastic things. There was nothing akin to Brad Sherman's famous quote from the Libra hearing, where he said that Libra was going to kill more Americans than 9-11. In general, the tone has started to shift into this notion of crypto is here, stable coins are here, so what are we going to do about it? I've made the point before that every single week that goes on, the talk about banning crypto is less credible than it ever has been. And I think this hearing definitely reinforces that. In a

Starting point is 00:02:59 minute we'll get into some of the details about questions and discussions people have, but it really was a different tone than what we've seen before. However, one thing that was probably inevitable, but which could be a little problematic, is that we're starting to see some amount of hardening of partisan narratives. Don Beyer, again, the chairman of the committee put it to the block like this. You have the structure of the debate already, which is that the Republicans are going to want as light a touch as possible, arguing that all the structures are already in place to make sure there's no fraud. And on the other hand, you have the Democratic witnesses who are more like, hey, we really got to make sure the stable coins are vetted and don't run out of cash.

Starting point is 00:03:39 We need to make sure that people can't go to the unreported exchanges and avoid taxes. Meanwhile, on the other side of the aisle, ranking Republican Mike Lee said things like, rigid one-size-fits-all regulation is something that's kind of scary. Now, obviously some of this calcification was inevitable, right? Democrats and Republicans do have fundamentally different views of the authority of government to regulate markets, after all. But it still does subject the industry to the vagaries of American politics a bit more than I'd like. Building on this theme, the reporting seemed to suggest that Democrats tended to favor

Starting point is 00:04:15 questions to Alexis Goldstein of the Open Market Institute. A representative question she had was, I have used large exchanges, I've tried out so-called decentralized finance or defy. While many claim this is the future of finance, this space looks a lot like the history of finance to me. Meanwhile, Republicans tended to like Peter Van Valkenberg from Coin Center, who said, America grew rich because of that openness.

Starting point is 00:04:36 We don't like permission systems in this country because we know that you can't prejudge genius. Congressman Tom Emmer certainly held up Peter Van Valkenberg, saying, quote, Peter Van Valkenberg's testimony today before the Joint Economic Committee underscored that crypto is just like every innovation that made America great, a product of our pioneers' ingenuity. At its core, blockchain technology allows us to share ideas, currency, and information without permission or centralized control. It allows us to own parts of our

Starting point is 00:05:01 digital identity that third parties currently profit from. We're already seeing countries like China attempt to regulate this technology out of existence. Their approach cannot be America's blueprint. All of my work in the crypto space, including bills like the Securities Clarity Act or Safe Harbor for Taxpayers with Forked Assets Act, which Peter Van Valkenberg mentioned today, is to give this technology, this next great innovation, a chance to thrive and Americans to thrive with it. NIDIG sponsors this podcast and they are helping banks, corporate treasuries, and fintechs integrate Bitcoin into their products and balance sheets.

Starting point is 00:05:39 See why Bitcoin means business at nidig.com slash NLW. That's nydig.com slash NLW. Now, let's talk about a few of the questions that were lobbied toward these expert witnesses. There was, as you might imagine, a fair bit on stablecoin. and tether. People are concerned about a run, but others brought up that demand for tether shows just how behind U.S. rails are. Basically, there are a number of folks who said, look, the demand for this product and the stickiness of this product shows that people want U.S. digital dollars. They just

Starting point is 00:06:14 don't want it with all the burdens that it comes with. And that's not necessarily about not paying taxes or hiding from the government. It's about the actual convenience and speed with which those dollars are able to be moved around. Tim Mossad, another witness and the former CFTC chair, also came out strongly against the idea of limiting stablecoin issuance to depository institution due to competitiveness concerns. This was in reference to the president's working group on financial markets, which had recommended that guidance a couple weeks ago. Massad and Valkenberg also agreed that competition around payments is to the benefit of everyone. Now, other thoughts on stable coins, there was a reiteration of previous concerns around reserve transparency and systemic risk

Starting point is 00:06:56 through holdings by hedge funds and family offices. And interestingly, there was at one point some debate among members around CBDCs and asking whether the existing Fed Now system could just be updated to have a real-time settlement. It was a bit wonky, but still a pretty interesting preview of debates to come on a US digital dollar. There was also, as you would imagine, some amount of discussion around crypto scams and cybercrime in the space, but there was an interesting shift in tone from previous hearings in that this was more forward-looking and focused on solutions. Again, Massad, for example, was saying basically that the CFTC should have more enforcement authority than it currently does. A subset of the crime discussion came around tax issues, which I would say the net of width is just better working with exchanges, which, by the way, every exchange has been loud and public about the fact that they want that.

Starting point is 00:07:44 Defi got a few mentions, but really just in the broader context of trying to let things grow before we squash them. And speaking of that, Senator Ted Cruz came out hard again. He said the one thing that is capable of screwing this all up is the United States Congress, and I have deep concerns that Congress is already in the process of doing so. Cruz went ham on the broker provision in the infrastructure bill, as well as the 6050I provision change to the tax code. He reiterated his stance that Congress and the Senate just simply do not know enough to be legislating around these areas. And frankly, he's also putting threat behind words.

Starting point is 00:08:18 On Tuesday, he introduced legislation to repeal the infrastructure bill's, quote, devastating attack on the emerging cryptocurrency industry, which is his words. Like his original amendment proposal during the infrastructure bill process, this would just rip that broker language out entirely. Now, overall, I just want to sum up that this was not an aggressive anti-crypto session. That wasn't even the subtext, even around the most notable and contentious issues right now, which have to do with stable coins. There seems to me to be a growing awareness of the risk of losing this industry offshore that is kind of counterbalancing more heavy-handed tendency. There is also a growing sense that these really are

Starting point is 00:08:58 issues that folks in Washington are going to have to understand, and potentially if they do, have an opportunity to win benefit from as well. I want to shift now to the infrastructure bill for just a minute. Like I said, Senator Ted Cruz has introduced legislation trying to peel back some of the excesses of that bill. Senator Cynthia Lummiss and Ron Wyden also have their own legislation, and on top of all that, representatives Patrick McHenry and Tim Ryan, a bipartisan pair, also introduced a new bill to restrict the IRS definition of digital asset broker. They're calling it the Keep Innovation in America Act, and the switch, as articulated by the block, says, current infrastructure bill defines a broker as, quote, any person who for consideration is responsible

Starting point is 00:09:39 for regularly providing any service effectuating transfers of digital assets on behalf of another person. The new bill would change that definition to quote, any person who for consideration, stands ready in the ordinary course of a trade or business to affect sales of digital assets at the direction of their customers. Basically, it's trying to get the non-custodial folks out of this definition. The bill also forces the Treasury Secretary to conduct a study on the impact of the proposed tax code chain 6050I. The bill currently has the support of eight other members, including members of the blockchain caucus. And Patrick McHenry, when announcing the bill, said we can fix these poorly constructed standards and ensure they are compatible

Starting point is 00:10:16 with how this new technology actually works. Kevin Brady, a supporter of the bill and the leading Republican on the House Ways and Means Committee, said, digital assets are here to stay, and this bill ensures that cryptocurrency reporting requirements are meaningful and effective. Now, this would be a jam-packed regulatory day just as it was, and yet there was more. As I mentioned before, the president's working group on financial markets recently released their report on stable coins. I said when I first reviewed it that I think that it should effectively kill the idea that

Starting point is 00:10:45 the U.S. government is trying to ban stable coins, but that doesn't mean that there weren't still big issues there. Particularly, there are big questions that come from the PWG report around who should be allowed to issue stablecoins. What that report said is, quote, to address risks to stablecoin users and guard against stablecoin runs, legislation should require stablecoin issuers to be insured depository institutions, which are subject to appropriate supervision and regulation at the depository institution and the holding company level. This is exactly what former CFTC chair and expert witness at that demystifying crypto hearing, Tim Mossad, said would inhibit innovation. And apparently, a Fed governor, Christopher Waller, seems to agree.

Starting point is 00:11:24 In a speech yesterday, he said that this is not the route that we should go. He said, the PWG report described one approach to the cost-benefit equation of stablecoins, restricting the issuance of payment stablecoins to ensure depository institutions and imposing strict limits on the behavior of wallet providers and other non-bank intermediaries. Given the economic similarities between payment stablecoins and bank deposits, I have no objection to the idea of banks issuing both instruments. However, I disagree with the notion that stablecoin issuance can or should only be conducted by banks, simply because of the nature of the liability.

Starting point is 00:11:57 That approach and mindset would eliminate a key benefit of a stable coin arrangement, that it serves as a viable competitor to banking organizations in their role as payment providers. The Federal Reserve and the Congress have long recognized the value in a vibrant, diverse payment system, which benefits from private sector innovation. That innovation can come from outside the banking sector, and we should not be surprised when it crops up in a commercial context, particularly in Silicon Valley. When it does, we should give those innovations the chance to compete with other systems and providers, including banks, on a clear and level playing field. He goes on to reiterate that making stable coin issuers play by the full bank playbook might not make

Starting point is 00:12:34 sense, that they are still ultimately doing only a very small sliver of the things that banks do. But where I wanted to land today and the net of all of this is that over the last few months, the infrastructure bill passed with its onerous provisions. The president's working group made this report, including with that particular onerous provision around only depository institutions being allowed to issue stable coins. Now what we're seeing is the counterpoint, the arguments for other approaches, and those things will ultimately balance out where we land. This is ultimately a messy, democratic process.

Starting point is 00:13:08 But as messy as it is, there is much to appreciate here and to be optimistic about. A final note, though. Remember how I told you about Constitution Dow a few days ago? Well, they are up to over $11,000, over $46 million heading into tonight's auction. If they win, you can bet we'll be talking about it tomorrow. Until then, guys, be safe and take care of each other. Peace.

The Breakdown - What We Learned From Congress' ‘Demystifying Crypto’ Hearing

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