The Wolf Of All Streets - Fire Gary Gensler And Restructure The SEC | Congressman Warren Davidson

Starting point is 00:00:00 He reached a settlement agreement with Kim Kardashian for $1.5 million. What was she marketing? She was marketing Ethereum Max. Not one of us. You're not in the club. What is happening here? You know, the I Love Puppies Act might actually be, you know, not about puppies at all. What is going on here? But if you think the government should spy on American citizens to keep them safe, you probably hate crypto, you know, because you kind of hate freedom. So it's long past time for us to take action. Many American crypto investors

Starting point is 00:00:30 believe that the SEC has been far too aggressive with their regulation by enforcement actions. And this is a result of Gary Gensler taking an activist approach towards our market. There are some people in government who are pushing back hard. Congressman Warren Davidson from Ohio has proposed the SEC Stabilization Act, which would effectively fire Gary Gensler and reconfigure the way that the SEC works. But he's also long been interested in the crypto industry and in Bitcoin in particular, and has been a voice trying to push through sensible legislation. We talked about this and so much more. You've proposed the SEC Stabilization Act. Can you just give some context as to what that is and why it's important to you? Yeah, so quickly, people summarized it as fire Gary Gensler. I

Starting point is 00:01:23 should be clear. It removes the chairman, who is fire Gary Gensler. I should be clear, it removes the chairman, who is currently Gary Gensler, but it does not remove him as a commissioner. So in a way, he wouldn't truly be fired, he would still be a commissioner, but he certainly wouldn't be the chairman. And so then it adds a sixth commissioner. So there would be three Republican commissioners, three Democrat commissioners, and then they could hire an executive director. The executive director would have no true authority except for what is extended by the board. And just for clarity, no former chairman can be hired as executive director. So, you know, that's the structural change. And then the real question is why? And fundamentally, I mean, I think about it like, look, the United States doesn't even

Starting point is 00:02:14 have 5% of the world's population. And we have almost 25% of the world's GDP, which is, you know, really impressive for our economy. But I think maybe even the more impressive stat is we have over 50% of the world's GDP, which is really impressive for our economy. But I think maybe even the more impressive stat is we have over 50 percent of the world's invested capital. So when people around the world want to find a return on their money, they put it to work in our markets, which helps our companies first and foremost, and frankly, helps our retirement savers and everything else because you get more dollars that bid up the price on shares. So it's great for us to have these strong capital markets.

Starting point is 00:02:50 And they're really threatened when people try to politicize them. And Gary Gensler has done that from the day he took office, pushing, you know, on average, two rulemakings a month. He doesn't get comment periods. He doesn't have legislation behind this. He's had more rulemakings than any chairman since Dodd-Frank. And Dodd-Frank was a major overhaul to the financial services space. But the only thing that happened here is Gary Gensler became chairman. So I think in the digital asset space that you and I spend a lot of time on, people are excited about it because he's done no rulemaking. He's

Starting point is 00:03:25 ready to make rules on everything that he wants to, except he doesn't have legislation for it. And in the one area where he refuses to make a rule, that's the area that would probably benefit the most. So I hope that along with this restructuring of the SEC, Congress will step in and really do its job and pass a law. And I think that's the logical consequence of having a six-person commission that's at parity. There is a body that when things get political and divisive and it's tough to find a way, there's a body that's supposed to work through that. It's Congress. And we're supposed to have the debates and work through how do we make the law more clear here. And then we pass legislation. We don't want like a politicized, hyperpartisan activist,

Starting point is 00:04:11 you know, really jeopardizing our capital markets. It's interesting because it seems that the SEC probably needed a restructuring before Gary Gensler. But Gary Gensler has somewhat galvanized the community or a large part of the United States behind this issue that now you're able to propose it. So perhaps it's not about Gary Gensler, but he's showing the worst side of what's possible at the SEC without this new structure. Yeah, that's exactly it. I mean, he exposed that there was a structural problem. He certainly exploited it. He showed how we're vulnerable to that. And frankly, the frustration that a lot of people in the market feel is, can't somebody do something? And the reality is, well, the president could fire him. But short of that, it really is tough to rein him in. And when we put appropriations language through, in theory, we could say none of these funds may be used to do

Starting point is 00:05:05 X, Y, Z, or these funds only become available if whatever, defense them in. But that's hardly precise. And, you know, we're going to definitely do that this summer as we work through the appropriations process on a host of things. So if you look at like this climate disclosure rule, the ESG rule, as it's commonly referred to, I mean, he doesn't have legal authority to do that. And there is some market demand for it. It's fairly politicized in terms of who wants what. Some people want more restrictive, somewhat more permissive, somewhat no standardized format at all. And just companies have a materiality standard, which is already the law, and you disclose material risks. And that's generally the Republican position. And

Starting point is 00:05:52 Democrats are a little bit divided in terms of, you know, what kind of disclosure regime they want, and someone a disclosure regime that also is tied to prohibitions and restrictions and obligations for everyone down to local farmers, you know, as part of a consequence of the reporting requirements of this. And that's the kind of thing that should go through law. That's also the point that the Supreme Court made recently with West Virginia versus the EPA, because the EPA wanted to regulate carbon. There are a lot of people that think we should regulate carbon, but there's no law that says that we're going to regulate carbon. So in the absence of that, the EPA can't just make some rule and decide to impose its own views on the whole economy. There is a law that would be required to be passed, and Congress should actually have those

Starting point is 00:06:42 debates and decide what kinds of actions we ought to take with respect to carbon. And I think that's really something that Congress probably needs is they need the obligation to do something, because in the absence of that, sometimes Congress doesn't actually do the thing they need to. Right. And my listeners, obviously, we're stuck in a bit of an echo chamber that's very hyper focused on the crypto market and not these other issues that you're discussing. But it sounds like this is problematic well beyond what we're seeing just in the crypto market. Yeah, absolutely. You know, if you listen to, you know, I listed seven abuses, but and that's only because we thought seven was more than enough. But there are slices of our capital markets all across that are frustrated with Gary Gensler. But yeah, the peak is probably in the digital

Starting point is 00:07:32 asset space, because he's not only failed to do his job with rulemaking, he's been so bad on selective enforcement. And the one that I always point out is, you know, he reached a settlement agreement with Kim Kardashian for one and a half million dollars for marketing an unregistered security. Well, what was she marketing? She was marketing Ethereum Max. They didn't take any enforcement action against Ethereum Max. Ethereum Max is still functioning just like it was prior to Kim Kardashian reaching a settlement with it. So it's not even coherent in that. And at the time they were working on that settlement, that's when FTX was blowing up and all the fraud was going on. And Gary Gensler was meeting with

Starting point is 00:08:14 Sam Bankman-Fried and others from FTX, and they caught nothing. So they've just been, I mean, epically bad in the digital asset space. But it feels like they're being purposely vague so that they can go after all these enforcement actions without actually having to clarify what is or is not a security when it comes to these assets and to your point it feels like they're just massively over correcting because egg on their face from sam bankman freed well that's part of it i think and the other part you know we're we're all a little nervous as blackrock files for an etf their batting average is off the charts of getting

Starting point is 00:08:49 whatever they asked for from the regulatory state. And meanwhile, people have been trying for a decade to get a Bitcoin ETF, suddenly BlackRock registers, and there's a concern that they're going to get preferential treatment. And that's kind of the, you know, quote, old boys club is, well, you know, they're one of us. So we can go ahead and approve them. But these new up and comers that would actually disrupt the marketplace, not one of us, you're not in the club. So there's no deal for you. I mean, there's people that could have been market disruptors a decade ago. And look at this is the thing thing gensler says that this is for investor protection uh you can't just block retail investors out of the market and call that investor protection

Starting point is 00:09:32 and that's exactly what he's doing frankly on this and a whole range of other issues yeah i would argue that they failed to protect investors when it actually counted in 2022 in the crypto market obviously with ftx voyager, Voyager, BlockFi, Celsius. And now they're actually hurting those very investors who hold these assets. And because they're passively deeming these things securities and listing them in these enforcement actions, the price is going down. Americans hold these assets, whether the SEC believes they should have or should not have in the past. And the price is going down directly because of the actions of the SEC. So they're not even not protecting, they're actually harming consumers and investors.

Starting point is 00:10:10 Very much so, actively. And when you look at other issues, if you look at the GameStop short squeeze, for example, that was never really resolved. And so their tactic was to go after he's got a rulemaking that undermines payment for water flow, which actually, if you look at like Robin Hood and others, they brought all kinds of retail investors into the market and let them participate. And essentially they said, no, I mean, if you want to communicate on Reddit or something, those people aren't us. But if you say the same thing on a Bloomberg terminal, well, OK, that's good. No problem. And so you think about Democratic access to capital. I think there are a lot of people that are mind blown. They're like, wait, wait. So the Democrats on this issue initially, Ted Cruz and AOC agreed. And then it's like somebody gave AOC the updated talking points and she's on the message with Elizabeth Warren. So I think, look, you see all this politicization.

Starting point is 00:11:14 The recipe isn't to empower a hyper partisan guy like Gary Gensler. The answer is to depoliticize our capital markets. Don't threaten this great thing we got going with our capital markets. Make Congress do our job. Let us have our debates. Some of them hopefully will land on the version that I want. But this is where we're supposed to debate

Starting point is 00:11:34 those kind of partisan things, not having an activist lead the Securities and Exchange Commission. You talked about it being bipartisan and AOC having the talking points. And I think we all see that. But I think that the notion that crypto and Bitcoin are bipartisan is actually a bit overblown. I mean, I've spoken with people on both sides of the aisle.

Starting point is 00:11:53 There seems that there's Democrats who support these assets. They're just a lot quieter about it after last year. The Republicans are perhaps more outspoken. But this seems once again like a narrative where it should be an issue and an asset class that both sides support. This is not hurting anyone. Yeah. And I mean, I've I've described it for years. It's kind of like the Patriot Act. You know, if if you look at the Patriot Act, it passed overwhelmingly with both parties supporting it. And you had more libertarian people like me saying, hey, this is a really bad idea. And I wasn't in office at that time. And you had, you know,

Starting point is 00:12:29 people on the left saying this is a really bad idea. But the consensus has been let's spy on American citizens. But, you know, just to keep us safe. We said it was going to be a bad idea. Turns out really bad idea. But if you think the government should spy on American citizens to keep them safe, you probably hate crypto, you know, because you kind of hate freedom in my view. And on the other side, if you if you hate the Patriot Act and the government spying on American citizens, whatever their excuse is, then you probably love crypto because you love freedom. And so I think that's at the heart of it. And when you look at the next layer down in the crypto space, if they can't ban it, which I think they've conceded that they can't get away with totally killing it,

Starting point is 00:13:15 the next thing they're trying to do is make sure that it stays permissioned so that it stays account based. They want to kill the idea of self-custody, the ability for you to essentially own private property, and then to be able to conduct transactions peer-to-peer with other people. They want a third party that they can control as an intermediary. And that kills it. How do you have DeFi without the D part? There's no decentralized portion of that. And self-custody is at the core. And essentially, that's a property rights discussion that and self-custody as at the core. And essentially, that's a property rights discussion that we're having. It's just in a digital space. So some people don't necessarily see it that way yet.

Starting point is 00:13:52 But that's really the heart. Can you own private property in a digital space? And then can you convey that to somebody else without having to get permission from some third party or the government directly. DeFi has long been seen as an opt out from the legacy system or as a way for people who are unbanked or underbanked to get access to capital markets, right, or even to get access to dollars through stable coins, which has been a huge trend in countries with hyperinflating currency. But do you think that these policies can actually kill DeFi? Or is this just another situation where Americans lose out, maybe non-accredited Americans lose out, and the rest of the world goes on and continues using these platforms and products, and Americans just can't? Well, I think the key is when you look at legislation,

Starting point is 00:14:40 which is forthcoming, you can't just judge a bill by its title, right? You know, the I Love Puppies Act might actually be, you know, not about puppies at all, or it might be something that's actually harmful to puppies. You know, so in this case, just because we're dealing with digital assets, until you really look into the details, let's make sure that we're not launching a Trojan horse on the American markets or, frankly, global markets, because, you know, how we go about this really will move the global markets. And we're counting on that because, you know, so much capital is invested in the United States and our traditional markets, but a huge percentage of the liquidity, the vast

Starting point is 00:15:18 majority of the liquidity is offshore right now. That isn't serving our interest. And frankly, in a way, it is undermining our dollar circulation. So why wouldn't we want to create extra demand for not just treasuries, but commodities? Commodity-backed stable coins, I think, are very promising. And they're legal in the state of New York right now. Paxos Gold is one. But the number of products that could be offered in that space that are actually backed by hard assets gets to the concern that you highlight is, what is actually backing this up? And when it's backed by treasuries, in a way, yeah, that's still the full faith in credit. That's not entirely different than the dollar. And it certainly is helpful to the problems in

Starting point is 00:16:02 the US in terms of creating extra demand for US Treasuries. But the other thing for some people is if you want to manage currency risk, sometimes tying it to a commodity that's broadly traded creates more stability in the market than anything else. And we've seen that over the past few years. Even our own domestic banks have had a hard time navigating interest rate risk because Treasuries moved up so rapidly. Yeah, absolutely the case. You mentioned earlier the BlackRock ETF, which has been sort of the story of the week that everybody's tearing apart and looking at every side. While that's happened, we've also seen the launch of EVX Exchange, which is Fidelity, Charles Schwab, and Citadel Securities. We've seen the Nasdaq getting actively involved.

Starting point is 00:16:45 Seems like all the big players are coincidentally entering into this space heavily in the very same two-week period that we're seeing the SEC crack down on Coinbase and Binance. Now, I hate to do tin hat theories. I'm not necessarily saying that there's something nefarious, but the timing does definitely seem curious for the SEC to be cracking down on one side while the big boys are coming in on the other. Yeah, it's almost like there was a delaying action and then they had a meeting somewhere and said, all right, this week. OK. And everyone said, all right, we're moving. And they all split their chips across the line in the same stretch. I don't know that we'll find the coordination that that has taken place. I can tell you, I certainly wasn't invited to any kind

Starting point is 00:17:25 of meeting like that. And Gary Gensler gave no signal that he was even going to be open to it until recently to the public. But you do have to start feeling a little, you know, what is going on here? And, you know, that's where Patrick McHenry sent out. I retweeted it like, hey, you know, no preferential treatment here because I think everybody is concerned. You know, BlackRock, Larry Fink in particular, very activist. He's very active politically. I mean, I think a lot of people know he would love to be the next Treasury Secretary. I mean, frankly, I would love somebody to be the next Treasury Secretary who's pro-American capitalism and pro-American markets. But the other thing

Starting point is 00:18:07 that's going on in the markets that was highlighted with our hearing recently, with Prometheum and the ties that they have to China, BlackRock clearly has a lot of ties to China and some issues where they literally worked against the shareholders of Exxon, where they have board seats for Exxon, and worked to advantage a Chinese state-owned oil company, you know, and then say, oh, but the ESG score was a bad thing for Exxon. But well, that doesn't really apply to the Chinese state-owned oil company that actually got the deal. So BlackRock has definitely done things like that, that should give us pause about the Chinese connection here. And that's certainly tainting some of the stuff that's going on right now in our markets. I mean, BlackRock is the undisputed king of ESG, right?

Starting point is 00:18:54 I mean, they're behind that entire narrative. And it doesn't apply to Chinese companies at all. Or apparently now the Bitcoin, which the narrative from that side was consistently that we were boiling the oceans and destroying the entire planet and using more electricity than all of Argentina. Where the rubber meets the road, it seems quite inconsistent. So does that mean that ESG is only a narrative until it doesn't make you money? Well, maybe. But the other side is who knows what their goals are with it, right? So there's a lot of concern there. I mean, their goals with Exxon, for example, they get three board seats and then

Starting point is 00:19:31 they use those board seats to do things that actually arm the shareholders of Exxon. That's not a good thing. And I mean, that still hasn't been properly addressed by the SEC, in my view. They have, as shareholders in America's markets, they have a fiduciary duty to vote those shares for the best interest of the shareholders, not for the ESG climate agenda that Larry Fink loves, but for the shareholders. That is, we haven't changed the legal definition of fiduciary. And that's at the heart of this ESG disclosure regime that they're pushing. And frankly, that ties to some of this same mindset that they're using that claim, again, only in America's markets to try to ban Bitcoin mining or the whole concept of

Starting point is 00:20:12 proof of work. And you'll find people that will carry the water and say, oh, well, I'm not attacking Bitcoin. I'm just attacking the proof of work protocol. There is no such thing as attacking proof of work without it being an actual attack on Bitcoin. You can just read the opening of the Bitcoin white paper, and it is all about the way that the blockchain works, which in their case is proof of work. Yeah, they're inextricably tied, of course. You mentioned Promethean before. I'm hesitant to even bring it up because it's so absurd. But the timeline behind that, I continue to study it and read it. It makes absolutely no sense, right? This is a company, you said, with ties to China. This is a company that nobody

Starting point is 00:20:59 had ever effectively heard of, run by two brothers that have law degrees from an unaccredited University who somehow are on Congress reading talking points in their testimony who got a license that nobody else seems to be able to get but can't actually trade any of the assets on the exchange what is happening here well something pretty fishy and I you, my kudos to my colleague, Mike Flood from Nebraska, who really did a nice job kind of exposing that in the hearing. But yeah, I mean, you call out the issues there with Promethean. I think the other thing is, even if you accept at face value, everything that was said in the hearing or everything that led them to get the approval that no one else has been able to escape from Hotel California, but these guys did. Surely you would at least agree that that's not an optimal path to launching anything. clear expedited path with certainty that the SEC, no one, whether it's Gensler or

Starting point is 00:22:07 successors or anyone else, is going to say, no, no, actually, that's a security now. And essentially, that's what Coinbase is facing. They go through and register, do an actual public offering and listing of shares. And then suddenly, Gensler's trying to shut them down for trading unregistered securities. I mean, they fully disclosed what the plan was. And then, you know, again, Gensler's saying, oh, we have to protect the investors. No, you're actually harming them. Is it his job? Is it the CFTC's job?

Starting point is 00:22:37 Is it Congress's job to deem these assets specifically as commodities or securities? Because it seems he's allowed to just continue, as we said, randomly listing them in enforcement actions, and then we're supposed to take it at face value that all of a sudden these 67 assets have become securities. Yeah, I mean, I think the fact that it isn't clear to the market, whether it's the innovators or the investors, it says that someone has to act. And the fact that it's also definitely not clear at the SEC or the CFTC, they have differences

Starting point is 00:23:09 of opinions. I think the question that best exposed the lack of clarity is Ethereum's been out for quite a while now. And Gary Gensler will refuse to answer whether that's a security or a commodity. If the rules are so clear today at the SEC, how in the world can Gary Gensler not tell you whether Ethereum is a security or not? All this says Congress has a duty to do. We have to provide legal clarity. And I've had the Token Taxonomy Act since December of 2018. So you think if we pass this bill that proposes a bright line test for what it is and what is not a security, and it proposes clear rules for custody, it proposes a de minimis exemption for trading that's in line with other currencies.

Starting point is 00:23:55 Those are the three things it does. How much better protected would have investors been if we had implemented that even at some point during 2019? So many things have gone on. You ran off a nice list of them. And we could have done even more for positive things that would have done capital formation. So it's long past time for us to take action. I'm encouraged that so many of my colleagues have become well-educated on it. And I'm hopeful that we can get some sort of bipartisan bill across the finish line soon. Yeah, I do think that it should be bipartisan support, especially after seeing all the things that have happened over the past year or two. You talked about the Taxonomy Act.

Starting point is 00:24:33 What is the proper way outside of the Howey test and securities laws from 1930s and 1940s for us to determine at least what some of these assets are? Listen, I can understand that it's hard when we're launching 500 of them a day, seemingly. It's hard to determine exactly what each of these are and meme coins. There's a lot of nonsense and it'd be disingenuous not to say that. But let's say the top 50 or 100 by market cap, real companies, real projects trying to solve problems. How do we once and for all determine what these assets are and how they should be regulated? Yeah, so good question. It has to be bright lines so that everyone looks at it and it's repeatable.

Starting point is 00:25:16 You look at it, I look at it, a total novice looks at it and they know, oh, this is, you know, this is an apple, right? And that's an orange and they're different. And it's pretty obvious that apples and oranges are not the same thing unless you want to broadly call them fruit. But that's about it. So if you look at the Howey test, it really isn't even a law, it's a court case. And the oranges themselves were not defined by securities. It was the investment contract that made them securities. It wasn't an orange. And in that sense, the token itself isn't what defines it.

Starting point is 00:25:51 It's just what does it actually represent? And so the bill that I proposed has a four part test. The proposal in the draft legislation that we've got coming out of committee has a different test. But the principle is we have to get a bright line. I mean, I think one of the common and a couple of common denominators that you're going to have to see is it has to be created, not promised. Right. It is an investment contract. If you're promising that someday this will exist, well, that's depending on the work that you're promising to do, whether you're successful or not. You know, so once it's created and not, you know, promised, then you could say, well,

Starting point is 00:26:33 OK, that's that's one of the criteria. The other thing is, is if one central authority could ultimately control it, then, you know, how how decentralized is it? Is it essentially dependent upon the efforts of some central authority? That starts to look a lot like a security. You're really depending on, you know, the management team of it or somebody that could alter, edit the protocol, even if they don't necessarily own a lot of the tokens, if they had some sort of control over it, sort of like the Federal Reserve. I mean, if you use Gensler's criteria on centralization, the dollar is definitely a security because the Fed can dilute it.

Starting point is 00:27:12 You know, you have to get it's not as simple as one thing, but you do have to get some consensus around how much central control does an authority exercise. And I think the other thing is it doesn't represent an interest in the entity. So you don't necessarily own like a share, you know, that those come with voting rights, they own the equity portion of the balance sheet. You know, so you could say this does not represent a portion of the equity in a business. And then there's really, I hope, a healthy debate over how to treat debt instruments. The idea that it represents debt doesn't necessarily need to make it a security. But under some interpretations of Reeves, that was what Gensler went after BlockFi under

Starting point is 00:28:05 and said, you can't be a lender. That's where Coinbase was shut down when they wanted to do a lending product. And the problem is retail investors essentially have no access to things that, you know, other people do in the structured credit market, the bond market, everything else. The retail investor doesn't have access to these things.

Starting point is 00:28:24 And in terms of capital formation, I think there's a way to tokenize that and say, this is something that you have to do what you say you're going to do. It has to be structured correctly, not controlled. The terms of the deal are made at the time of the issuance. But if we could keep that available to retail investors and not through broker dealers, I think there's a way to do some sort of tokenized debt instrument as well. I don't know if that'll survive final passage, but I hope it does. Well, I look forward to seeing this finally legislated and debated on the floor, and hopefully we get some sensible regulation.

Starting point is 00:29:01 I have to thank you. I think that you've lit a small fire that's really starting to rage here very quickly. And it seems that there's really significant blowback for the policies of the SEC at this point. People are really trying to take notice. So thank you very much for your very large part in that. And please let us know as a community what we can do to help push this forward and help get some sensible regulation and legislation on the books. Yeah, thanks for what you're doing. And I, you know, a lot of people have great platforms. Thanks for using yours to spread the word. And I, you know,

Starting point is 00:29:29 I just encourage people to actually just take time to get on your member of Congress's calendar. And if you can get, whether it's a, you know, house of representatives or in the Senate, get on someone's calendar, explain why this is important to you. I think a lot of the community is probably pretty left of center. You know, they time, as I talk to some people, saying, boy, I don't know if I can vote for a guy as conservative as you, Warren Davidson, but I like what you're doing in this space. I'm like, okay, well, let's work together on things we agree on. And of course, we're going to disagree on some things. But for people that you do agree with on so many other issues, but

Starting point is 00:30:03 they're terrible on crypto, let them know like, Hey man, I want to be for you, but I can't, you're killing my whole livelihood here. You're literally destroying capital formation in America. I can't stay for you if that's going to be your position. And I think people got to understand how real and how big that feeling is in the market. And maybe Sherrod Brown over in the Senate will take action and we'll get something through the Senate. I absolutely hope so. And it's nice to hear that your average American can actually still get in contact with their congressman or senator and have an impact. So I encourage everybody to try. Thank you so much for your time, Congressman. I really appreciate it. Yeah, likewise. Thanks very much.

The Wolf Of All Streets - Fire Gary Gensler And Restructure The SEC | Congressman Warren Davidson

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