The Breakdown - Why the Carlyle Group’s David Rubenstein Says Governments Can't Stop Crypto

Episode Date: May 22, 2021

On this week’s “Breakdown Weekly Recap,” NLW explores U.S. regulatory FUD. He specifically looks at recent statements from the SEC’s Gary Gensler, as well as new Treasury Dept. policy that wants businesses to report crypto transactions of over $10,000 to the Internal Revenue Service. He argues that this is a “bureaucrat's bull market” that will be focused on compliance, not banning.  -- Earn up to 12% APY on Bitcoin, Ethereum, USD, EUR, GBP, Stablecoins & more. Get started at nexo.io -- 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=   Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW   The Breakdown is produced and distributed by CoinDesk.com

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 and produced and distributed by CoinDes. What's going on, guys? It is Saturday, May 22nd, and that means it's time for the weekly recap. And on this weekly recap, we're going to be talking about why the Carlisle Group's David Rubinstein says governments can't stop crypto, why crypto is here to stay. This week has been an absolute FUD parade. We've had Elon Environmental FUD, Regulatory FUD, Tether FUD, crime fud. I mean, it's really been a murderer's row of concern trolling. And obviously on this show, we spent a lot of time trying to unpack how much that FUD actually had to do with the crash

that happened earlier this week. You should go back and listen to the last couple of episodes if you're interested in that. The TLDR is that the FUD really wasn't at the center of it. Instead, it was a loss of momentum and a weakening market structure that created a situation where there was always going to be a catalyst for a downward move, and a lot of leverage in the system made sure that that move was going to be rather dramatic when it happened. That's exactly what we saw, but as the market has recovered, the fud has not slowed. To be clear, this always happens. There's a cadre of professional commentators who wait for any perceived weakness in Bitcoin and Crypto to rehash their old talking points. This week, we've seen it in a New Yorker writer making the highly dubious

argument that only criminals want privacy. Paul Krugman, once again revealing that he just can't get over the libertarian politics of many Bitcoiners to actually engage with the technology on any substantial level. But it hasn't just been the chattering class spouting these things. We've had a significant amount of discussion on the regulatory front. Here are a few of the latest hits. New SEC Chair Gary Gensler spoke at the 2021 FINRA conference. FinRA stands for financial industry regulatory authority. The comments aren't long at all, and there's has been a lot of tea leaf reading and interpretation. The two things that are notable is that from an overall orientation, it seems like Gensler's SEC will have a strong emphasis on investor protection.

That is clearly not restricted to crypto, but at the same time, it does involve crypto. What's more, technology is always evolving as are our markets. As we continue to stay abreast of these developments, the SEC should be ready to bring cases involving issues such as crypto, cyber, and fintech. I believe we also should remain focused on how our agencies used to technology and data analytics to surveil the markets and enforce the law. Now, this doesn't really strike me as anything other than a reaffirmation of what we would expect. First of all, this is Gensler speaking to the law enforcement set. In fact, he closed his remarks saying, quote, America's securities laws have been an important part of our economic success for the last 90 years.

And enforcement is a key reason why. I look forward to working with our fellow cops on the beat at FINRA to protect American investors in capital markets. Second of all, of course they're going to enforce laws. That's a big part of what the SEC does. It's always been what the SEC does. In fact, Gensler has given some clear indications that he understands the limits of the scope of his agency, particularly when it comes to designing regulation around crypto, which is positive. Third, enforcement isn't something that a priori we should be concerned with. I'd love to see something like SEC Commissioner Hester Purse's safe harbor rules, so that the things the SEC pursues are actually truly bad actors. But in general, no one in the Bitcoin or crypto space should want scam

projects to exist. They make it worse for everyone except the small group of insiders that they enrich. To be honest, though, Gensler's comments weren't the biggest regulatory fud getting play. On Thursday, Bloomberg headlines started flying around about how the U.S. Treasury Department wanted all crypto transactions over $10,000 reported to the IRS. Of course, people flew off the handle before understanding what it really was, so here's the deal. One part of the Biden tax overhaul is increasing tax rates, but the other part is trying to get people to actually pay what they Remember, they want to add like 87,000 employees to the IRS to improve enforcement, increase audits, etc.

Part of that compliance regime is to have crypto transfers to businesses of at least $10,000 be reported to the IRS, aka this is not peer-to-peer, it's for businesses. The negative side of this, the Treasury repeated the idea of crypto for crime, saying, quote, cryptocurrency already poses a significant detection problem by facilitating a legal activity broadly, including tax evasion. Still, the reaction in the market has been massively overblown. This is simply the same standard that cash is held to. Now, I often fear that cash will feel quaintly pro-citizen in the future.

I tend to share the concern that once digital cash exists, they will work to squeeze out the far less trackable, surveillable paper notes. So, frankly, having crypto held to the paper cash standard doesn't bother me much. Looking for the best way to unlock your crypto's liquidity? Nexo.io is exactly what you need. borrow against your digital assets at just 5.9% APR, earn passive income with yields of up to 12%, and swap between more than 75 market pairs with the instant nexo exchange. Try the NXO wallet app to get the whole 360 degrees of crypto banking.

Get started at nexo.io. So how do we sum it all up? Well, here's what Caitlin Long had to say about it. She tweeted, it's clear a U.S. crypto regulatory crackdown is starting, but I'm optimistic because most of the major players in agencies have spoken already, and the policy is taking shape. It's pay taxes, comply with laws, and don't take shortcuts, and will enable the innovation. It's not a Bitcoin ban. A clear chronology. Fed releases payment systems access guidelines. May 5th. SEC warns about Bitcoin futures, May 11th. Binance IRS, DOJ story in Bloomberg, 513. IRS article in the Wall Street Journal

warning to pay taxes, 514. FDIC ice thaws. It issues its first RF5-17. OCC says reviewing all prior crypto bank actions, 518. Senate banking chairman warns OCC to clamp down on trust bank charters 519. Treasury Secretary Yellen announces big IRS tax compliance push 520. Fed's Powell plans paper on payment innovation 520. Spot pattern, news almost every day. Theme compliance. It's pay taxes, comply with laws, and don't take shortcuts. Not a ban. Nothing yet from FinC, CFTC or FTC, but pretty much all the other DC regular. have now spoken. I definitely agree with the broad strokes of what Caitlin is saying, although I have a hard time going so far as to call it a crackdown. If I had to characterize the sentiment I see from

bureaucrats in Washington right now, it's that they see themselves as part of a grand post-Trumpian cleanup. That's going to look like more regulation and more burdensome processes, and in some case, there is real risk of them over-correcting. I said earlier this week that I'm watching the OCC particularly closely. But it doesn't feel like a new hostility to me, the people who are hostile have always been so. However, if you want to take from a true DC insider, let's listen to comments from David Rubinstein, the CEO of the Carlisle Group. Carlisle is a multinational private equity firm that has more than $250 billion of assets under management. Much more important than that, Rubinstein is the insider's insider. I mean, if you view DC as the swamp, this is Solkinar

the Swamp King. To give just one example, Carlisle hired and was Jerome Powell's boss for eight years. So here's what he had to say about crypto and government. Crypto has come from nowhere to be a force in the market. It's, in effect, a gold substitute for some. And I have invested in not cryptocurrencies myself, but in things that facilitate the trading of it, in various companies that are helping to trade or make it easier for people to be involved with cryptocurrency.

And I did that in part because I think it's here to stay. Cryptocurrency is not going away, just like gold is not going away. So yes, it had its ups and downs, and yesterday was not a good day for it. But that's true of anything that is relatively new. And I don't think you're going to see anything like crypto going away and disappearing. It's here. And it's here because people in the market want something other than just the traditional currencies that we've had. And whether that's right or wrong, it's clearly something that the market wants.

So, yes, if you go into cryptocurrencies, you should expect big ups and downs and big fluctuations. And if you're not prepared to that, don't go into cryptocurrency. But the idea that cryptocurrency is going to go away or that the government is going to be able to stop cryptocurrency from being something investors want, I think is unrealistic at this point. Those highlight words, though, here to stay. Government couldn't stop crypto from being something investors want. This is a man who understands markets explaining that the demand from markets makes it extremely hard to conceive of a government successfully fighting it. If this view reflects a growing DC consensus view, what would the implications be?

Well, you wouldn't see haughty notions of banning anything. You would see bureaucrats trying to bring the parts of crypto that touch their little sphere of influence in line with what they perceive to be are the relevant applications of existing regulations. In other words, exactly what we're seeing, exactly what Caitlin Long laid out. This is the bureaucrats bull market. It's not about banning, it's about ensuring compliance. That doesn't mean everything will be easy and hunky-dorian without some problematic interpretations of what compliance means. But it is fundamentally different than the sort of of existential rhetoric that has been floating around. Now, one last note on compliance. There is regulatory compliance, but there is also normative compliance. One of the major shifts in government is a more serious focus on ESG concerns, with the E for environment being chief among them. Hold aside debates about the substance of that for now. There is no denying that the government in power views as chief among its jobs to write the ship when it comes to progress on climate change. Part of that is putting pressure on businesses to comply. This is coming through the Treasury, through the Fed, and more. My guess is that there's going to be a race to make good on the promise of the greening of crypto. More renewables

in mining, a shift to POS for Ethereum and more. I think Elon is going to be seen as one of the catalyst for it, and I think that perhaps this China mining ban that we discussed yesterday will be a part of that as well. Already, FtX and Bitmex have announced that they're going to be buying carbon offsets, and I hardly think this is the last that you'll see of that. For now, guys, I mean, it has just been one of the crazier weeks. I thought last week was nuts, but this one took the cake. I hope that as we're going through it, you're taking some time to reflect and to enjoy that you are a part of living history. For now, I hope you're having a great weekend. I appreciate you listening, and until tomorrow, be safe and take care of each other. Peace. We're witnessing the

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