The Breakdown - Why This Week's House and Senate Hearings Suggest a New Relationship Between Crypto and US Lawmakers

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 nexus.io, Arculus, and FtX, and produced and distributed by CoinDesk. What's going on, guys? It is Saturday, February 12th, and that means it's time for the weekly recap. However, before that, if you are enjoying the breakdown, please go subscribe, give it five stars, give it a review, or if you want to dig deeper into the conversation, join us on the Breakers Discord. You can find a link in the show notes

Starting point is 00:00:40 or go to bit.org slash breakdown pod. Additionally, a disclosure. On top of them being a sponsor of the show, I also work with FTX, and one final note before we get into today's conversation. This week, I am super pleased to have a special sponsor in Meld. If you've ever wondered how the rich are able to spend their money and still stay rich,

Starting point is 00:01:03 it's because they borrow against their assets. Meld is creating a protocol that can be used by anyone and which offers this exact service, but in a decentralized way. Users of Meld's protocol will be able to borrow dollars, euros, and other fiat currencies against their cryptocurrencies. If you want to learn more about the first defy non-custodial banking protocol today, go check out meld.com. That's MELD.com. So on to the show, and the big theme of this week has been these big picture macro type factors pointing in different directions for the crypto markets. On the one hand, you have the Fed in the midst of its big 180 on monetary policy moving over the course of this year, it seems, all the way from QE quantitative easing last year to QT quantitative tightening this year,

Starting point is 00:01:46 removing liquidity from the system. And risk assets aren't having a good time with that, as we saw pretty much all of January. On the other hand, you have these big picture adoption stories happening. Russia deciding not only to not ban Bitcoin, but in fact, to regulate cryptos as currencies in the country. BlackRock reportedly beginning to accept crypto as collateral for loans, as well as build crypto trading into their proprietary Aladdin platform. Now, of course, in all of this, one of the things that has a potentially outsized impact on the industry is the U.S. regulatory landscape. This week, there were two separate hearings related to digital assets. On Tuesday, February 8th, the House Financial Services Committee held a hearing called

Starting point is 00:02:30 digital assets in the future of finance, the president's working group on financial markets report on stable coins. On Wednesday, February 9th, the Senate Committee on Agriculture, Nutrition, and Forestry, which oversees the CFTC, held a hearing called examining digital assets, risks, regulation, and innovation. So let's discuss what we learned and let's just go in linear order, starting with the House Financial Services Committee. Overall, it sort of seems like this can only be described as the grilling of a representative of the Biden administration by Congress. The One witness for the hearing was Nellie Lang, who's the Undersecretary for Domestic Finance at the U.S. Department of the Treasury. This hearing represented a chance for Congress to ask questions around the

Starting point is 00:03:08 President's Working Group report on Stablecoins, and it was definitely not a ringing endorsement of that document. Ranking Member Representative Patrick McHenry set the tone right from the beginning that this was going to be, at least in part, a rejection of the President's Working Group recommendations. He said, Stablecoins are viewed as extremely risky. What's the solution of this working group? How do they mitigate this alleged risk? They make them all banks. They regulate them all as banks and then give them a federal taxpayer backstop, which is completely the opposite direction we've been moving in for the last decade in Washington. We're trying to de-risk, not add risk to the federal taxpayer. That doesn't make

Starting point is 00:03:43 any sense to me. Let me be clear. I'm not saying there's zero risk, but Washington's knee-jerk reaction to regulate out of fear will not allow stable coins to achieve their full potential, and the myriad of solutions they may be able to present. We cannot regulate out of fear of the future. It is Congress's role to seek solutions that directly address the risks at hand and ensure that the benefits are also a part of those discussions. Requiring stablecoins only to be issued by banks would be a major obstacle for us continuing to foster innovation within this nascent industry. This is quite clearly the key theme of this discussion. The big pushback was around the report's argument that stable coin issuers needed to be banks effectively. Jake Chravinsky

Starting point is 00:04:27 sum this up as well, saying lost in the mess of today's news cycle was another positive and constructive House Financial Services Committee hearing on stablecoins. The big question is if all stablecoin issuers have to become insured depository institutions, read banks. The committee mostly said no. Bankers in disbelief. Nexo is a trusted and easy to use crypto platform, where you can buy cryptocurrencies at the touch of a button and start earning up to 18% annual interest that is paid out daily. They support all. of the major assets on the market and even allow you to swap one asset for another or borrow cash against your crypto without selling it. Nearly 3 million people in over 200 countries trust

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Starting point is 00:06:27 When you trade NFTs on FTCX, you pay no gas fees. Download the FTCX app today and use referral code breakdown to support the show. A few other comments from members of this committee on this topic. William Timmons, a Republican, said it seems obvious to me that regulating a product under a regime designed for something completely different. While it may solve some problems, it's likely to create many more problems and stifle innovation in an emerging industry that shows great promise. I personally think it would be better for Congress to do their job into craft policy specifically for this new emerging industry. I would like to think that Congress might be able to do better.

Starting point is 00:07:04 Disruption is a natural part of a free market economy. New products and technology emerge and shake things up. It can sometimes lead to short-term pain for entrenched industries, but it forces adaptation and almost always leads to better products for consumers and more prosperity for our communities. I urge my colleagues to really find a better path forward. Now, for her part, Nelly Liang admits that the president's working group report was in part an attempt to create a way to do this without having to add regulatory schemes and bodies. So it may not be that they did something wrong, it may just be that they had the wrong framework and that it in fact should be Congress's job to make these sort of determinations. Certainly as an American citizen, people that I can hold accountable

Starting point is 00:07:43 in the voting booth for the policies they set when it comes to an industry that I find as important as crypto would make me a lot happier than it being determined by bureaucrats. A key thing here, though, is that this was not just a line from Republicans. Joyce Beattie, a Democrat said, at one time I thought this was more like the Wild Wild West, and now I realize it is the future frontier. I don't want to overregulate to the point it chokes off innovation. I do believe well-thought-out regulation would provide some legitimacy to the space and allow it to further flourish. Now, one sort of negative note for the industry that I will point out is that Tether appears not to be making many friends, and that's not just in terms of Democrats. Bill Posey, a Republican from Florida, asked some questions that he couldn't

Starting point is 00:08:21 get answered. Warren Davidson, who is a huge advocate of the industry in an interview with the block called Tether a time bomb, saying they acknowledge that they have commercial paper, but they don't disclose what exactly that is. That's where I think a framework that compels disclosure does provide investor protection. Now, a little bit of game theory here. Many have advocated within the crypto industry that the best policy, or at least the starting policy, for stablecoin regulation, is full reserve transparency, a level of reserve transparency that we haven't had yet. This shift to focus on that question may, in fact, be advocates of the industry like Davidson, setting up a quite winnable political battle. Still, overall, the tone was very constructive. Representative

Starting point is 00:09:01 Jake Ockincloss said, the Financial Services Committee hearing yesterday on stablecoins crystallized three domains of risk that lawmakers must address. One, prudential risk, two, systemic risk, three, geo-economic. Prudential risk in the form of run-risk and payment system risk. Registration, audit, and disclosure requirements for stablecoin issuers and custodians are the clear and present next steps. NLW note, that's exactly what we were just talking about. Two, systemic risk. The FSOC should continue to monitor and report on systemic risk from stablecoins given how fast the industry is growing. But right now, it's modest and does not justify red tape that could lead to regulatory capture of crypto by banks. NLW note again, I will remind you that this is a

Starting point is 00:09:40 Democrat from Massachusetts. Number three, geo-economic, the U.S.D must persist as the global reserve currency that may not require a CBDC. Thoughtful research and regulation of fintech, sound monetary policy, rule of law, strong capital markets, a growing economy. These are the critical drivers of U.S.D. reserve status. Jake Chavinsky, who's the head of policy at blockchain association, said we have smart and engaged leaders like Jake Ockin-Klaas to thank for the Fantastic House Financial Services Committee hearings we've had recently. He signals a big generational shift in Congress, bringing a sophisticated and bipartisan understanding of crypto. You'll love to see it. Now let's shift over to Wednesday's Senate hearing.

Starting point is 00:10:18 Again, this was the Senate Committee on Agriculture, and the hearing was called examining digital assets, risks, regulation, and innovation. It was actually split into two parts. The first part was a discussion with Rosten Benham, who's the chairman of the CFTC. The second part featured witnesses including Sandra Rowe, the CEO at the Global Blockchain, business council, Sam Bankman-Fried, obviously the CEO at FDX, Perry Ann Boring, the CEO at the Chamber of Digital Commerce, and Kevin Warbach, who's a professor at the Wharton School. The beginning especially, but really this spilled over into both sessions, had a core question around authority. Basically, it feels very clear that some types of asset offerings are within the SEC's

Starting point is 00:10:55 jurisdiction. On the other hand, it feels like there is clear authority around futures and derivatives with the CFTC. A big challenge is where spot commodities like Bitcoin and ETH fall, and given that that makes up the majority of activity, that not being clear is a big challenge. In part then, the hearing took on the role of a referendum on expanding the power of the CFTC to get that authority to regulate spot Bitcoin, Eith, and other crypto commodities. Benham's testimony was clearly in favor of making that shift, but also was about what additional tools they would need to properly regulate that market. They made it clear that they needed some amount of expanded infrastructure. He also made it clear that this was not a larger mission creep moving into cash commodity markets in agriculture

Starting point is 00:11:38 or energy or anything like that. Instead, he was saying that crypto assets are uniquely consumer-facing and needed to be regulated on that basis as a very specific type of commodity. Benham reiterated that Bitcoin and Ethereum are commodities in the CFTC's opinion. but also highlighted that while there are undoubtedly securities, a new framework and rules needed to be drawn up around the space. Like I said, overall, it was largely about whether the CFTC is in a good position to take on a broad and regulatory role as it relates to digital assets. Panel 2 was a lot about education and senators taking the time to engage with some members of the industry and other experts to discuss topics of interest. Each of the panelists had a

Starting point is 00:12:19 slightly different focus. For Perriand Boring, the head of the Chamber of Digital Commerce, that focus was urging regulatory clarity, with the explicit commentary that they've seen projects spend five years awaiting that regulatory clarity before finally moving offshore. She said, we find ourselves in a new space race. It is the cyberspace race of controlling the systems and the governance that will power the digital economy. I fear that we are so far behind that we haven't even acknowledged that there is a race underway. As the world's largest economy, the stakes cannot be higher. This theme is something. something that SBF reinforced as well. He said, 95% of volume is offshore. Most tokens are traded

Starting point is 00:12:55 exclusively offshore because of the lack of clarity today. That poses a real threat to the U.S. I would love to see that come back onshore. You look at the majority of digital asset transactions they are conducted via U.S. dollar-backed stable coins right now. That could change to a different currency if the U.S. does not take the lead on providing a clear pathway and oversight for digital asset transactions. You could see the center of the digital economy being somewhere other than the United States like the center of most other marketplaces and economies. Sam also pointed out that this was particularly disparate from the fact that a huge part of the infrastructure of crypto had come from the U.S., even though trading volume was around the world. Kevin Warbach pointed out that there

Starting point is 00:13:32 are some regulations now, saying too much of the conversation around digital assets starts with the mistaken assumption that they are currently unregulated. Even more importantly, the divide between agencies shouldn't be a reason for gaps in the regulatory regime. Someone needs clear authority over spot markets and digital assets that are not considered securities over exchanges that are now among the most valuable and prominent firms and financial services, and the only way over the long run to promote trust in legitimate firms is to distinguish and take down the bad actors. Now again, I think that the clear tone here was something positive. We're back in a post-hearing tweet said encouraged by the bipartisanship and constructive industry attitudes at today's

Starting point is 00:14:09 hearing on digital assets. This is not an ideological war between regulation and innovation. It's a problem-solving exercise to create conditions for trust. Jacob Hirschman, a legal intern at the Defi Education Fund, said the tone of hearings in both the House Financial Services Committee yesterday and the Senate Ag Committee today were positive, constructive, and well-informed. Really nice to see the members asking deep and important questions. Kudos to members and staff on doing the research. Things are looking up.

Starting point is 00:14:34 I think this is actually the new dividing line. It's not really Democrat and Republican, and it's not even old or young, although some of both of those dynamics certainly still apply. It's really about being informed and engaged or not. And in terms of why that is, I think there's both substance and politics. The geopolitics are getting much clearer. There was a much stronger undertone around the geopolitical risk of losing. This is impacted by China's current Decept trials as well as Russian adoption. But there was also a much more explicit and extensive argument of the risk of losing business offshore and finally a realization of the role stablecoins

Starting point is 00:15:09 could play in preserving and extending the dollar's hegemony. These are new and important narratives that I anticipate becoming a bigger part of the political discourse around crypto assets and stable coins in the months to come. But there's also politics. The crypto lobby is getting stronger. It's well-financed. And just overall, the crypto industry, both in terms of its institutions and its individuals, are going to play a bigger and bigger role in politics going forward. And the primaries are coming up quickly. With all of this between geopolitics and just domestic politics, buckle in folks because it's going to be one hell of a year. I want to say thanks again to my sponsors for supporting the show, nexo.io, arculus, FTX, and mel.com,

Starting point is 00:15:50 and thanks to you guys for listening. Until tomorrow, be safe and take care of each other. Peace.

The Breakdown - Why This Week's House and Senate Hearings Suggest a New Relationship Between Crypto and US Lawmakers

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