The Breakdown - With SAB121 Overturned, A New Era of Crypto Politics Begins

Episode Date: May 18, 2024

By a vote of 60-38, the Senate has voted to repeal SAB121. The decision is in direct defiance of the Biden White House, who pledged to veto the bill if it passed. The decision has changed the landscape of crypto politics. Today's Show Brought To You By Ledger - 5% to Bitcoin Developers When You Buy https://shop.ledger.com/pages/bitcoin-hardware-wallet Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribe to the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

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. What's going on, guys? It is Friday, May 17th, and today we are talking about one of the biggest weeks in crypto legal history. Before we get into that, however, 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. All right, friends, well, usually on Friday we have the Friday 5, but for a couple of scheduling reasons, we did not do that today, and honestly it works out because we have a big follow-up from yesterday's show. Of course, we're talking about the SEC's Staff Accounting Bulletin 121 and the vote to repeal it.

This has become a huge line-in-the-sand-sand-type issue in D.C. when it comes to crypto, and yesterday something pretty dramatic happened. The Senate passed the bill to repeal SB 121 by a vote, of 60 to 32. 12 Democrats broke ranks to vote for the bill. The bill will now go to the president's desk to be signed into law and will have to wait and see if the Biden administration carries through with their threat to veto it. Now once again, the bulletin suggests that crypto custodians should place customer assets on their own balance sheet. This removes the ability to provide bankruptcy remote custody and functionally prevents commercial banks from providing

custody services. The guidance was criticized by the GAO, aka the government accountability office, for being effectively a rule that was passed without going through the standard rulemaking procedure. This GAO finding allowed SB 121 to be subjected to congressional oversight, which is how this bill came about. Ahead of the Senate vote, the SEC attempted to justify the guidance, stating, time and again, we have seen crypto firms fail and watched as their customers lined up at the bankruptcy court in hopes of getting what they thought was legally theirs. We've also seen the risks to investors in firms that safeguard these assets when they are hidden off-balance sheet.

These disclosures provide investors important line of sight into the level of risk taken by crypto custodians. The logic presented here is that SAB-121 does not, in fact, require crypto assets to be held on a custodian's balance sheet. The SEC are claiming that this guidance merely ensures that risk disclosures are accurate. Leader of the anti-crypto army herself, Elizabeth Warren, expanded on this theme during her speech on the Senate floor, which she will be absolutely shocked to learn, was filled with half-truths and misleading statements. She claimed that the vote was related to a staff bulletin that shouldn't be subject to congressional review and doesn't have the force of law. This, of course, is a direct contradiction to the findings of the GAO.

Speaking to the actual contents of SAB-121, Warren claimed that the special accounting treatment was justified by the unique risk of crypto hacks. She said that SAB-121 simply clarifies how companies should account for those risks and their financial disclosures. That's all it's doing. Warren argued that SAB-121 isn't functionally changing the law to require custodians to put customer assets on their own balance sheet. Instead, her view was that it merely, quote, requires disclosure of what other substantive laws, including bankruptcy law, are already doing. Although there have been many crypto-bankruptcies that did pull customer assets into the bankruptcy estate, none of them have been dedicated custodians. It also seems odd that a bank as large as BNY

Mellon would get to the point of nearly launching a bankruptcy remote custody service without realizing that existing laws prevented them from doing so. More broadly, what Warren seemed to be doing was defending the tactics of choke point 2.0. She claimed that SB 121 didn't carry the force of law and was merely beefing up disclosures surrounding existing law. If this feels like Groundhog Day to you, it's because we've seen this strategy time and time again over the last year. Regulators produce guidance that has very real ramifications for businesses, but weren't strictly rules or laws, so of course they couldn't be challenged in any meaningful way. Given that, I believe that this vote represents Congress saying enough is enough. If regulators want to pass a rule making something illegal,

they should do that through the proper channels. They should present the rule for public scrutiny and make the policy transparent. And good news for us, it appears that Congress is no longer willing to tolerate policy being made through backroom regulatory threats and unchallengeable guidance. Again, to your shock and surprise, crypto lawyers were unimpressed with Warren's presentation. A lawyer known as Logan on X stated,

watching Elizabeth Warren bloviate about SAB 121 right now and she misses the point entirely. If you want to pass a law, pass a damn law. But you don't get to do backdoor lawmaking through SABs, avoid the rulemaking process, and make a mockery of federalism. Hello, breakers. Today's episode is sponsored by Ledger.

As another cycle ramps up, it's another chance to think about your Bitcoin custody best practices, and of course, to help all the new folks do the same. Ledger is the global platform for securing Bitcoin and other crypto. Ledger combines both hardware wallets and the Ledger Live app to offer the best way to buy, sell, swap, and stake without sacrificing on security or self-custody. Ledger features cutting-edge technology in the form of a certified secure chip

and a proprietary operating system, but also brings ease of use. This makes Ledger a safe and secure way to manage your digital assets without all the stress. Check out the link to the Bitcoin Ledger Nano in the show notes. 5% of all sales of the Bitcoin Ledger Nano go to support Bitcoin development. Thanks once again to Ledger for supporting the breakdown. Now, moving on to the actual vote. What matters here is the 12 Democrats who defied Senator Warren and the White House to vote for the bill. Much like the House vote, it wasn't just existing pro-crypto-democrat senators that voted for the measure.

Each of these votes matter, but by far the most important was Senate Majority Leader Chuck Schumer. Schumer is arguably the second most powerful Democrat in Washington. Him breaking ranks on this issue is a massive statement against the administration's crypto policy. I think it would be a mistake to think that that means Schumer is coming all the way over into the pro-crypto camp. Indeed, a public statement indicated that his issue was more to do with federal overreach. Schumer stated, New York State already has a strong law on the books and they weren't consulted on this regulation. Similar points have been made recently by other New York Democrats on stable coin legislation. It seems to me that there is a growing sense that the crypto industry

is important to New York State and that local regulators will fight the federal government for a seat at the table. So now, with the bill passed through Congress, we'll have to wait and see if the president delivers on a threat to veto. Blockchain Association Director of Government relations Ron Hammond said that a veto was, quote, guaranteed. Congress can overturn a presidential veto with a two-thirds majority, but based on the votes on SAB-121, it suggests the numbers aren't there. Hammond added that even if the bill is vetoed, this week has still massively increased the profile of crypto issues in Washington. He said, one thing the fight on SAB-121 has shown in D.C. is that there is a large constituency of grassroots and industry engaged. This is also the first

time many in Congress are hearing about the number of people passionate about this issue. With the major market structure vote looming next week in the full House, there are a lot of folks in D.C. hearing about crypto. In a public statement, the Blockchain Association said, the threat of a presidential veto denies the fact that there is a growing awareness among the voting public, particularly young people, that crypto is something our elected official should care about. Cody Carbone, the vice president of policy for the Chamber of Digital Commerce, said that a veto would be, quote, nonsensical. He added, that no independent regulator is above the law, and consumer protection should always trump

personal vendettas against a disfavored industry. Fox business reporter Eleanor Territ brought up some interesting points about congressional procedure. The president now has 10 days excluding Sundays to either veto or sign the bill. If he does nothing in Congress is in session, then the bill will become law even without the president's signature. Congress will be out of session when the time limit expires in late May, opening the possibility for something referred to as a pocket veto. Territ wrote, this means a president can basically give a stamp of disapproval and pin the bill slash resolution ultimately not becoming law on Congress not being in session.

It can be used as a strategic way to not get too much political backlash. She added that Congress can be called back to D.C. for a special session to prevent a pocket veto. We don't have any indication that a pocket veto is the current plan, but if the goal is to minimize the political backlash of a veto, then this could be the way it plays out. And if it does, it seems like a massive miscalculation by the White House. This issue has engaged the entire crypto industry and become a referendum on crypto policy ahead of the election. The idea that the president could just sneak a veto pass with no one noticing just doesn't seem likely.

Regardless of whether a veto happens, the lawmakers who champion this bill celebrated its passage through Congress. Republican Mike Flood said, it is clear there is overwhelming opposition to SB 121, and I urge President Joe Biden to reconsider his previous statement of intent to veto the resolution. The president should sign my resolution to ensure the SEC reverse his course, and sets America on a path to our growing digital financial future. Democrat Wiley Nicol added, Today's Senate vote to repeal SB 121 sends a clear bipartisan message.

Congress will not stand idly by as Gary Gensler and the SEC deliberately sidestep the statutory rulemaking process and overstep their regulatory authority. Senator Cynthia Lummis said this is a win for financial innovation and a clear rebuke of the way the Biden administration and Chair Gary Gensler have treated crypto assets and marks the first time both chambers of Congress have passed standalone crypto legislation. We are just getting started. The whole affair generated

much better than average takes, I have to say. True Ventures partner Gus Caldebella said, a few good things about the vote in the Senate beyond the win for sound digital asset regulation in the U.S. One, Congress did its job. Traditionally, executive agencies had a check on their desire to push the boundaries of their authority to their limits. Congress might strip away the authority altogether if they used it unreasonably. Congressional inaction has tamped down that limit on executive overreach, encouraging the SEC and other agencies to rush past reasonable limits over and over. But SAB-121 united both parties to reassert Congress's prerogatives versus an unchecked executive branch. That's a good thing.

Number two, the president may be realizing the downside of outsourcing economic policymaking. When a president gives the economic policy reins to someone outside the administration like Senator Warren, and other common constraint on radical executive action, the president's desire to be re-elected doesn't apply. In fact, it's reversed. The person to whom the president has outsource his economic policy, may assume she has only one term to get her agenda in place, re-election of the president be damned. The SAB 121 vote may cause the president to reassess how Senator Warren's prerogatives fit with his electoral goals, which would be a good thing. Electoral Capital founder, Avishal Garg, had a long thread, with the key part being this.

Why is this all a big deal? Why should anyone care? Democrats have been following Senator Warren's lead on all things financial and tech. Dems, including leadership, broke ranks with Senator Warren to push back on SEC overreach. This signals a huge shift in power and leadership. The signal here to Senator Warren, Joe Biden, the SEC, and the markets is tremendous. Dems have made clear they will shift to the center and away from the far left on market and financial regulations. For those following polls and swing states, this is not a surprise. How did this happen? A, Dems in Congress and Senate understanding the importance of crypto, B, a lot of hard work from a number of people in groups behind the scenes. C, a funny and

ironic incentive alignment between the banks and the crypto industry. Indeed, lots of people pointed out that Warren's anti-crypto army seems to be collapsing. Caitlin Long summarized it as peak Warren is over. And with the surprise success of the SCB-121 vote, there is a sense that crypto policy is building momentum in Washington. Republican House Leader Patrick McHenry is hoping it carries forward to next week when the financial innovation and technology for the 21st Century Act is presented for a House vote. This bill is being referred to as Fit 21 and is the comprehensive market structure bill

that was hashed out over the past year. Primarily, it allocates regulatory roles to the SEC and the CFTC, the most important being oversight of Bitcoin spot markets. The bill also provides a framework for determining which tokens are securities and which are commodities. McHenry has said that passing crypto legislation will define his legacy in Congress ahead of his retirement at the end of the year, so expect him to be highly motivated to push this bill through. Digital Assets subcommittee Chairman French Hill said that he viewed the 21 House Democrat votes on SAB-121 as a base case and believes he can whip even more votes for Fit 21. He said, I'm optimistic and I expect strong

democratic support. This one is about the future. So friends, like I said, a very consequential week in D.C. when it comes to crypto. Big shout out to the huge number of people working behind the scenes and in front of the scenes to get this done. Those efforts have borne fruit, and we are in a much better place closing this week than we were at the beginning of the week because of it. For now, however, that is going to do it for today's breakdown. Big thank you as always to my sponsor for today's show, Ledger. Check out the Ledger Bitcoin Orange Nano. 5% of sales will go to support Bitcoin Development. Until next time, be safe and take care of each other. Peace.