Unchained - Congressman Patrick McHenry: 'Bitcoin Will Be of Enormous Value' - Ep.142

Episode Date: October 22, 2019

Congressman Patrick McHenry, or 'Mr. Fintech' to his peers in the House, is announcing the reintroduction of the Financial Services Innovation Act, a bill that would create what he calls "permanent beta testing," or many jurisdictions call "regulatory sandboxes," in which entrepreneurs can apply for regulatory approval to conduct innovative experiments. The bill is intended to get regulators into a position where their default leans more toward yes than no. He describes how this would affect teams that want to conduct ICOs, how it would square with the phenomenon of some token teams trying to raise through Reg A+, and whether it would allow exchanges without BitLicenses to operate in New York. He also discusses what type of digital currency he believes is best suited to compete against a Chinese digital yuan, and says the government is currently looking into whether or not the Federal Reserve has the authority to issue a digital dollar. Thank you to our sponsors!  CipherTrace: http://ciphertrace.com/unchained Crypto.com: https://crypto.com Kraken: https://www.kraken.com Episode links:  Congressman McHenry: https://mchenry.house.gov/ On Twitter: https://twitter.com/PatrickMcHenry The House Libra hearings from July 2019: https://www.youtube.com/watch?v=9-ZTkCNW0w8 Financial Services Innovation Act explainer: https://www.alta.org/file.cfm?name=McHenry-Bill-Explainer Introduction of the bill in 2016: https://www.wsj.com/articles/u-s-house-bill-aims-to-set-up-sandbox-for-fintech-innovation-1474539893 https://www.natlawreview.com/article/financial-services-innovation-act-us-wants-sandbox-too Congressman McHenry’s interest in fintech: https://www.politico.com/agenda/story/2016/09/patrick-henry-mr-fintech-interview-000214 CNBC article on how Libra is being slowed by regulation while China’s central bank digital currency speeds ahead: https://www.cnbc.com/2019/10/15/china-races-to-launch-a-cryptocurrency-that-could-rival-facebooks.html Fortune article: https://fortune.com/2019/10/16/if-libra-fails-china-wins-the-ledger/ Learn more about your ad choices. Visit megaphone.fm/adchoices

Hi, everyone. Welcome to Unchained, your no-hype resource for all things crypto. I'm your host, Laura Schind. Heads up, everyone. In case you missed it, a few weeks ago, I rolled out a new feature on Unconfirmed, a weekly news recap. Through my survey, you listeners said you'd be interested in hearing about the weekly news on the show. Now you can listen to my take on the top stories of the week after my guest interview at the end of every unconfirmed. So if you haven't yet, go subscribe now. crypto.com get their app and buy crypto at true cost with no fees or markups. Get a metal MCO visa card with up to 5% back on all your spending. Want more? Download the crypto.com app today. Cracken is the best exchange in the world for buying and selling digital assets. It has the tightest security, deep liquidity, and a great fee structure with no minimum or hidden fees.

Whether you're looking for a simple fiat on-ramp or few. futures trading, Crackin is the place for you. CipherTrace cutting-edge cryptocurrency intelligence powers anti-money laundering, blockchain analytics, and threat intel. Leading exchanges, virtual currency businesses, banks, and regulators themselves use CipherTrace to comply with regulation and to monitor compliance. My guest today is Congressman Patrick McHenry, the ranking member of the House Financial Services Committee. Welcome, Congressman McHenry. Well, thank you. Thank you. Thanks for having me on, Laura. One quick note before we begin, there are votes in the House today, and so Congressman

McHenry may be called away a bit abruptly, which we might all hear with a buzzer. Hopefully that won't happen, but I wanted to give you all a heads up just in case. Congressman McHenry, you're well known in the crypto community for your support of the crypto and blockchain space. You've called Bitcoin, quote, an unstoppable force in last summer's hearings on Libra. You're also known as the House's Mr. FinTech. And you have some news that you are announcing today, the day that my podcast has being released. But before we get into all that, I actually just wanted to ask you first, how did you hear about and become interested in Bitcoin and crypto? Well, look, I'm interested in the world of payments.

And I think for many, the crypto space is a fascinating area of technology moving much faster than what the regulated have been able to do. And so I saw this early on in Bitcoin, first with a white paper and trying to understand what this meant, and then the ramp up in value of Bitcoin and then other cryptocurrencies trying to emulate what Satoshi brought to the world. And so I've been fascinated by it and watched it from a distance and tried to make sense of what the right governmental resources. response was. And my conclusion was any action by government, really up until the last two or three years, any action by the government would be negative, would impair innovation, and would restrict the development of cryptocurrencies and their enormous value now and in the future. And so it was far better to have folks slowly be informed on Capitol Hill rather than rush to go kill an idea or try to kill an idea.

Now we're at a different phase when it comes to cryptocurrencies and we need to have smarter regulations so that you can have money brought to bear, legitimate long-term investors brought to bear for these new innovations that are taking place. So we need to have some certainty out of the CFTC and out of the Secures and Exchange Commission here in Washington, D.C., as well as a better understanding from Treasury and the IRS about taxing authority. So I think there's real government work that still needs to be done. And so that's actually a perfect segue to your news today. You are reintroducing the Financial Services Innovation Act. What does this bill do and what problem are you trying to solve with it? Well, the bill says that states that we need to have financial service innovation offices within every office of the government that deals with financial service issues. And there are 10 of them, actually, from the Federal Reserve and the CFPB to the Treasury Department, to the FDIC and all the other banking regulators we know of as well as the Securities and Exchange Commission.

What this bill is about is ensuring that our regulators are innovation forward, innovative, innovation permissioned and situated to say yes rather than the default, no. I want the default to be yes to innovation, not the current default of no. And so this would allow agencies to provide space for new innovations in the marketplace. In Great Britain, they call it sandboxes. what I think of for us in the United States is permanent beta testing. We should allow data to be collected and for us to meet societal goals. And the way this act allows for that is by those innovators to go to these offices

and get an enforcement compliance agreement that if accepted would allow them to provide innovative products or services under an alternative compliance plan. which would provide waivers and modifications to current regulations that are out of date or unduly burdensome. And I think this is a necessary step towards creating a regulatory process that works with financial innovation rather than against it. And in the announcement, you actually specifically call out that the bill could have an impact on the blockchain and crypto space.

And you mentioned that the bill would give the SEC and the CFTC a more formalized process to collaborate with innovators and provide them with regulations. and provide them with regulatory certainty, you probably are aware that a lot of crypto teams in particular have been complaining or I don't know if complaining is the right word, but criticizing the SEC. And so I was just curious to know, how would this affect, for instance, a team that wanted to issue a coin through what, you know, used to be called an initial coin offering? Well, I think this would drive this process forward in a more aggressive way.

and and I think it is a particular value to the blockchain cryptocurrency space because we're going to have new products that are going to be layered on top of this technology and this new form of decentralized distributed ledgers. And what this will enable is these teams to go to the regulators and get a space to operate in, provide data back to the regulators and say, you know, here, here's what's working and here's how we're meeting these societal goals that are stated in law, but we're doing it a different way. And so, you know, we still have regulations on the books that are driven about the innovations of the 30s and 40s, which is using a telephone or telegraph to get information provided more quickly. We've got to update those things. And we have to force the regulators to update these things in a real, in a changing environment,

because it's not really just about the United States anymore. It's about a global competition for this innovation. So when I think of this Financial Services Innovation Act, I think of the cryptocurrency space as being a great beneficiary of it and changing the mindset of these regulators to be permissioned to go in and want to be yes, rather than desire to be no. And so in recent months, I guess, because, you know, a lot of these different teams that want to build crypto networks have been worried about action from the SEC. The new trend, or a trend doesn't even a word, because this is so onerous, very few people are doing it. But at least one of the teams or a couple of the teams have gone the reggae plus route of trying to fundraise.

Right. Blackstack, right? Yeah. And I think you now was another. So how would this, these innovation, what did you call them, the ECA is basically the enforcement compliance agreements, as you call them in the bill, how would that work with something like these Jobs Act options that people are pursuing? Well, it would then this act would enable the CFTC and SECC to work together on a framework, on a frame, and then get information back on how the capital raise went and how the conversion. from that capital raise into the technology into a coin and the nature of that conversion and get data back. Right now, we have these regulators making decisions without real data. And I think that's quite unfortunate.

So, but what you're saying is, like, it would enable these teams to do a fundraise without having to go through the exact reggae process, but maybe it wouldn't look like the initial coin offerings of 2017. somewhere like in the middle? Is that what this would look like? Well, they would be able to petition to the SEC, get an understanding, and then do the raise. And so what this would do is give the SEC the capacity to give new forms of capital raise opportunities. So what I'm saying is something new could be invented that isn't, you know, reg A plus a reggae offering was not designed for initial coin offerings. And initial coin offerings,

weren't designed to meet reggae rules. And now they both, so you've basically had to engineer initial coin offerings into this weird box of a rule that was not contemplated for the technology or much less this type of technology. Right, right. That makes sense. And one other thing I was curious about is, would this apply in any way to the crypto projects that did have initial coin offerings in 2017? Or is it, it's not retroactive? So any SEC enforcement actions could still happen against those?

Sure. It doesn't, it doesn't preclude SEC enforcement action on a going forward basis or a look back basis. We don't deal with that. What we do is create a new permissioned system that didn't exist, that hasn't existed in the United States before. And so your bill, you know, as you mentioned, would essentially create these different regulatory sandboxes. And I was just wondering, why did you structure it so that each of these agencies has its own financial services innovation office rather than one single sandbox that's overseen by one of the departments like, say, the Commerce Department? Well, the reason why I went with each one of these regulators is because they do very specific things. So if you're talking about the commodities, futures, trading.

Commission, they're dealing with commodities, whereas the Secures and Exchange Commission is dealing with securities, sort of a basic differential. And the Office of Comptroller of Currency deals with national bank charters. So we wanted to use that regulatory expertise within these agencies for their specific rules and regulations that they enforce and get them to open these new all. offices for financial innovation. A few of them have done offices of financial innovation, but none of them have the force of law necessary to provide flexibility and regulation. And what we're doing is changing that mindset. The issue here in the United States is that we

have a very complicated regulatory regime when it comes to financial products. We have things that are regulated at the state level, not at the federal level. Other other things that are regulated at the federal level and not the state level. Then once you get to the federal level, it could be somebody could be a bank and be regulated by one regulator or be another bank and be regulated by two or three regulators. And if you're a public company, you have a whole separate set of regulation. So what we've tried to do is not get into that bigger battle about having a streamlined regulatory approach for financial products. That is a bigger fight than I think what we're trying to achieve with this.

What we won is for financial innovation, for all these regulators to be at the forefront of what they do rather than some backwater. And we want them to be positioned to say yes, not their default, no. And you may not know these details, but I just wanted to ask these questions in case you do. what does it look like for somebody to apply for one of these so-called enforceable compliance agreements? And, you know, when you obtain one, what does that allow you to do? Does it cost anything to apply for one?

How long does it take to get the approval? Like, just walk through the process. Well, we want the approval process to be pretty fast. But we're still working through the details of how that would happen. In terms of the cost, it will be minimal cost to do that. But the goal here, so what you would, in essence, do is whether or not you're a large or small entity, you could approach the regulator with your particular jurisdiction. Approach them and say, we seek to do X. However, you have a regulation on your books that says that we cannot do X because we're using a piece of technology that we can't have somebody sign a physical piece of paper.

We'd like them to be able to take a picture of their signature rather than fax us something, which is your current regulation. That would just be one small example of using technology, not in a groundbreaking way, in a very simple, basic way. And then you get permission through these enforcement compliance agreements to do that trial for that period of time with, those new restrictions on how you use the product and the data sharing back to the regulators so that they can fix. There we have the bells for votes. Okay.

And for your listeners, bells here on Capitol Hill sound like buzzers. But that means that the House is voting now. But the approach here is to get a modification. to current regulation or a waiver of current regulation in order to have a new product. That's what we're trying to get. And so you can think of it this way as I said beta testing at the opening to explain this. But the idea of beta testing means that you're not locked in for what this is. You think it might work.

and the experience may be that absolutely doesn't work, or you want to take it to scale. And so what we're trying to do is get the regulators to think of this as beta testing. To think of this is a small change to see how it works. And if it works, then you go forward at scale. And if it doesn't work, then you stop it. And that's what we're trying to work through. And if I'm an exchange that doesn't currently have a bit like,

since could I use one of these compliance agreements to serve New York customers? Potentially. Potentially. That still has to be worked out. And the way that this act will be utilized is really broad and quite open, not just for cryptocurrency, but for financial technology writ large. And you first tried to introduce this bill in 2016. Do you have any sense of what the chances are?

that it will be passed now? Well, we're still working through that. It's very early. We have interest from a number of senators on the Republican and Democratic side of the aisle to team up with us on this. And we do have a bipartisan under a group of folks on both among Republicans and Democrats in the House that want to have clarity for cryptocurrencies. And a wider group that perhaps are inclined.

around blockchain, and that's just a general inclination because they don't quite understand cryptocurrency and are not willing to dive more deeply in. And so there's a bipartisan group that is interested in this type of legislating around financial innovation. So we're hopeful that we can get something done as Congress. In a moment, we'll discuss Libra, but first a quick word from the sponsors who make this show possible. Will the world follow France and advocate banning privacy coins? Will government-backed stable coins become the new fiat? Are distributed and peer-to-peer exchanges just a flash in the pan? The answer is maybe. Virtual currencies can flourish and create a new, private, and more versatile economy. But that grand vision can't happen without keeping crypto clean.

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Join the over 1 million others and download the crypto.com app today. Back to my conversation with Congressman McHenry. Let's switch to Central Bank Digital Currency and Libra. the People's Bank of China is going to be releasing its own digital currency. And there was a note that some RBC analysts published where they said, quote, If U.S. regulators ultimately dismiss Libra and decide not to draft regulation to encourage crypto innovation in the U.S., China's central bank digital currency may be strategically positioned to become the de facto global digital currency in emerging economies, largely through AliPay,

we chat, union pay, and other messaging and payment apps. what do you think would be best positioned to compete with the Chinese central bank digital currency, a USD central bank digital currency or an app-based one such as Libra or telegrams cryptocurrency or a completely decentralized one such as Bitcoin or something else? Well, look, let me start by saying this. I think Libra has opened people's, a lot of new people's eyes about the value of cryptocurrency. Libra is not cryptocurrency, however, and we need to stop lumping it together with very real, very important projects that are out there like Bitcoin.

And that's not to bash Facebook or the Libra project, but the distinction between a wholly new financial invention like Bitcoin, I think that has enormous. long-term value, enormous long-term value. And like many things, Bitcoin is at such a very early stage relative to the rest of human invention. And so how Bitcoin will be used, we don't know. in 20 years what Bitcoin looks like, I don't, I'm not, I don't have the capacity to predict. But I do think it will be of enormous value and utility. When it comes to, when it comes to the question of a US dollar, a digitized US dollar, I think that is a reasonable next step for our central bank.

your interview with the Federal Reserve's chief economist was quite instructive because it exposes the fact that to the public that the Federal Reserve is contemplating and is trying to understand digital currency and their appropriate role is a dollar as a store of value and international trade. So I think there's enormous value there. I think as an American, I would like to have a response to AliPay. And we should not allow the Chinese to write the rules of the road of international finance. And we therefore have to have a more competitive mindset about ensuring that there is international commerce using a system that is not Chinese based. And so when you say that we should have some kind of response, what do you think would be best for a U.S. central bank digital currency or for something that is already tied to an app like Libra or like Bitcoin, something completely different. Those aren't the only choices. Right. I mean, I think when you're

talking about, there are very different things. I think when you talk about a truly decentralized, long-term store of value and a belief in the system, not in a belief in a government or governmental entities, I think true cryptocurrency has enormous value separate and aside from this conversation. But as an American, I would say, and as an American policymaker, I think the U.S. dollar and the Federal Reserve having a basically a digital asset version of the U.S. dollar is of enormous value for global trade and the safety of that global trade. So I think that has huge value. I also think that there's value in American companies creating these innovations, whether it's a truly decentralized asset and capacity of trade like Bitcoin or something of that sort or something is more traditional in nature, which is sort of a different derivation of PayPal, whether it be sort of the Chinese version, which is AliPay or some new creation.

like Libra. So from what you said, is it correct to assume that you would then kind of encourage the launch of Libra, but also maybe be supportive of a USDA central bank digital currency? Absolutely. Are you in a position to like introduce legislation to get that going, that you know, a USD digital dollar? We're looking into whether or not the Federal Reserve has the legal capacity currently to issue. issue a digital currency. And until we're able to come to a serious conclusion there, or proper understanding, I'm not going to file legislation. If they do not currently have the legal authority, I will support legislation that gives the Federal Reserve that capacity. And how quickly do you think all that would take? Because as far as I understand, I think

that Chinese digital currency is going to be released in the next few months. I don't know the time frame, but I don't know the time frame, but we have to change our mindset here. The American government, my government, has had the view that we don't have to compete for things that are governmental, meaning the value of our currency, our regulatory regime. We think that, you know, since we're a dominant economy on the globe, large economy on the globe, that we can write the rule. for the rest of the world. We have to change our mindset. We have to be aware that we have to compete against other regimes around the globe, and we have to compete with private sector innovation. And so I think there's huge value in us changing the mindset from the Federal Reserve and

financial regulators so that we have a competitive mindset rather than a reactionary one. And do we have time for one quick question before you? I think you have to run in a moment. Okay. So I was just wondering, I mean, you seem to be quite forward. thinking about all of these issues and to really have your finger in the pulse. But I was wondering if you could describe the overall either attitude toward and or like level of education about these issues amongst your fellow congressman and congresswomen. We have folks that have spent time to deeply study cryptocurrency, for instance. And we have a bipartisan group that have sponsored a bill written by a colleague of mine, Warren Davidson of Ohio,

the Token Taxonomy Act, which defines digital currencies and the conversion point from when you do an ICO to what becomes a new object in the world, which is that coin offering, which is wholly different in most respects from previous creations by securities regulation. There's a bipartisan group that understands cryptocurrency. It's not a big group. I would say it's a, uh, really, relative to the size of the House and the Senate is a very, very small group, but really informed and quite inclined towards cryptocurrency and this innovation. That's positive. We have a larger group that is distrustful of technology, and I think that is problematic. But since the beginning of time, since being of innovation, you know, there have always Luddites have existed. I mean,

quite frankly, the word Luddite comes from innovation in textile manufacturing. and the belief that that innovation would have destroyed jobs. It did not destroy jobs. It created more jobs in the textile industry, though they were scared of the innovation at the time. So we need to make sure that we have more folks that are informed. And so for your listeners, it is really important they engage in Washington because we need smart policymakers when it comes to cryptocurrency.

We need smart governmental leaders. and we need regulators that are informed so that we can lead the world, not be a backwater to the world when it comes to cryptocurrencies. Okay, great. Well, where can people learn more about you and this bill? My website, which is mchenry.com. And on Twitter and Facebook and all the other interactions you can possibly have online, And easy to find me on Twitter for sure.

And that's the best engagement. I learned a great deal off of Twitter. It's not all a dumpster fire. And around innovation, it's some of the best information I'm able to glean from the world. So Twitter would be a great, great spot to get me. Okay. Perfect. I will link to your Twitter page in the show notes.

Well, thank you so much. Thank you, Laura. And thanks for what you're doing to make sure the world is a better place. and better understands the value and the change that is occurring. And you've engaged so well with every aspect around cryptocurrencies from the real innovators to the distrustful regulators and everywhere in between. So I'm grateful for the information that you're able to glean and share and glad to be a listener. Thank you.

Thanks for listening. And I hope to have you back on the show. Thank you, Laura. Thanks so much for joining us today. To learn more about Congressman McKenry, check out the show notes inside your podcast player. If you're not yet subscribed to my other podcast unconfirmed, which is shorter, a bit news year and now features a short news recap. Be sure to check that out. Also, find out what I think are the top crypto stories each week by signing it from my email newsletter at Unchainedpodcast.com. Unchained is produced by me, Laura Shin, with help from fractal recording, Anthony Youne, Daniel Ness, and Josh Durham. Thanks for listening.