Unchained - Rep. Warren Davidson: 'I Think Bitcoin Is a Great Store of Value' - Ep.176

Episode Date: June 9, 2020

U.S. House Representative, Warren Davidson, contextualizes the state of crypto legislation in terms of widespread civil unrest, COVID-19, and global shifts in power. He explains where crypto plays a role in these paradigm shifts and talks about: Why he believes in crypto, and how he came into the space How his Token Taxonomy Act creates regulatory clarity for token issuers What four conditions tokens would have to meet to not be considered securities Other features of the Token Taxonomy Act, including a de minimus exemption for taxes and no taxation of crypto-to-crypto trades How the pandemic and coronavirus-related fiscal stimulus affects the prospects for the Token Taxonomy Act What he thinks about China's blockchain push and its DCEP digital yuan Whether and how that creates a credible threat to US dominance in global markets Whether Libra could be a counterweight How a shift toward digital currencies could undermine the global reserve status of the USD and whether that affects the US's ability to enforce sanctions How outcomes of the upcoming election will affect the potential passage of crypto-friendly regulation Why it is easier for crypto legislation to be more bi-partisan than other bills   What help he needs from the industry right now to push along crypto-friendly bills Thank you to our sponsors!  Crypto.com: https://crypto.com Kelman Law: https://crypto.law   Stellar: https://www.stellar.org Episode links:  Rep. Warren Davidson: https://twitter.com/WarrenDavidson His House page: https://davidson.house.gov Press release on the Token Taxonomy Act: https://davidson.house.gov/media-center/press-releases/token-taxonomy-act-address-blockchain-innovation-flight-america Token Taxonomy Act on GovTrack: https://www.govtrack.us/congress/bills/116/hr2144 Text of the Token Taxonomy Act: https://www.govtrack.us/congress/bills/116/hr2144/text Letter requesting IRS clarify some crypto tax policies: https://www.coindesk.com/us-lawmakers-ask-irs-to-clarify-crypto-tax-rules-around-airdrops-forks-in-new-letter Congressman Patrick McHenry on Unchained discussing his “permanent beta testing” idea for crypto: https://unchainedpodcast.com/congressman-patrick-mchenry-bitcoin-will-be-of-enormous-value/ Unchained interview on the DCEP: https://unchainedpodcast.com/why-china-aims-to-replace-cash-with-the-digital-yuan/ Unchained interview with Libra co-creator Christian Catalini: https://unchainedpodcast.com/a-libra-co-creator-on-how-facebook-will-make-money-from-calibra/ Unchained with Christopher Giancarlo on his proposal for a digital dollar: https://unchainedpodcast.com/christopher-giancarlo-on-the-craziness-of-becoming-crypto-dad/ Secretary Steve Mnuchin on Libra and a digital dollar: https://www.bloomberg.com/news/articles/2019-12-05/mnuchin-powell-see-no-need-for-fed-to-issue-digital-currency Video in which Rep. Davidson says “shitcoin”: https://www.coindesk.com/lawmakers-amp-up-pressure-on-facebook-to-halt-libra-cryptocurrency-development Meltem Demirors and Jill Carlson on the Shitcoin Waterfall on Unchained: https://unchainedpodcast.com/meltem-demirors-and-jill-carlson-on-the-shitcoin-waterfall-ep-74/taxes Learn more about your ad choices. Visit megaphone.fm/adchoices

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Kelman PLC run by some of the first lawyers to enter crypto in 2013 is here to help. Go to www.compan.law with 1L not 2 or email them at info at kelman.law. Today's guest is U.S. Representative Warren Davidson of Ohio. Welcome, Congressman Davidson. Good to talk with you, Laura. Your background is a mix of military and MBA and owning and operating manufacturing companies. How did you come to be a congressman and also get into Bitcoin? Yeah, so I guess how did I become a congressman?

You know, John Boehner was the member of Congress that represented my district, and, of course, he was also the Speaker of the House. So when he resigned, you know, I wasn't planning to run for Congress. At that time, I owned a group of manufacturing companies. And so he resigned in September of 15. You know, initially there were a couple people running against him, but then all your more credible candidates got in right away after he announced it. In October, you start getting invitations to fundraisers.

And then November, a couple people stopped in my office really to raise money for another cause. and they said, you know, it'd be great. They asked who I was going to back in the race. And I said, well, you guys are the political people. And they said, it'd be great if there was an Army Ranger business guy in the race. And, you know, I came home and I thought my wife would laugh, kind of like you did, because that was my reaction. And she said, well, what did you tell them?

I said, well, tell them they're crazy because it's crazy. And she says, call them back. You'd be great at that. You know, ultimately I did and, you know, won the race. So that's how I came to be in Congress. But, you know, I took an interest in Bitcoin, you know, early on because in manufacturing, we had a lot of international payments. And, you know, it has all the payment system problems that people recognize that would be watching or listening to this podcast.

And so you would wire transfer money. And it was early on, it was really clunky because you couldn't wire direct to China, for example. So you'd go through Hong Kong. It was very inefficient. And that led to an interest in things like Digi Cash and other things. So when Bitcoin came on the scene, you say, oh, this really is a pretty elegant solution, pretty neat idea. Wow. Okay. So you were really following this stuff even before if you knew about Digi Cash. Yeah, I mean, not as a, unfortunately not as a Silicon Valley investor, just as a manufacturing guy,

I kind of felt a problem here in the Midwest. Right. And I just want to say, for listeners who don't remember, we're both from the same state, Ohio, great state. So we had tried to do this interview back in December and due to technical issues. We couldn't finish it. And what was interesting is this time around when I went to repair, everything in the world had changed so drastically that some of the questions not only seemed outdated, but almost quaint. And I still feel like, you know, we need to dive into that background. So people understand kind of what it is that you've been working on in crypto and blockchain pre-pandemic. So why don't we just kind of cover that ground?

now. So in April of 2019, you introduced the Token Taxonomy Act in the House. What problems were you trying to solve with that bill and what are the main points that it proposes? Yeah, so the bill itself really was a product of work done in 2018. So, you know, like I covered, I got into Congress and then ultimately on the Financial Services Committee, people will remember in that stretch, 2017 in particular, the ICO market was really hot. And Congress really wasn't doing anything about it. There were regulatory, you know, turf wars and, you know, court cases that were coming out, providing a patchwork. And normally, that's a great time for Congress to come in and provide some sort of clarity, what should the law be. And we couldn't get momentum on that. So 18, 2018 was coming

around and we couldn't get that. So as a, you know, junior member of Congress, I can't really hold a hearing, but I could hold a meeting. So I decided to hold a meeting. And in September of 18, we had this roundtable. It was initially, like, let's get a dozen or so. People in this space thought leaders. And it turned into, oh, well, these people are coming. Well, let's send our CEO or, you know, general counsel. And then that led to bigger firms and more credible firms in the space.

And I think you were saying some of them were like Fidelity, State Street, A16C. Can you list some of the others? And Jason Horowitz, you know, and small firms, you know, early stage startups like 10XTS, an Ohio company, you know, and, you know, file coin was there from consensus, you know, so many of the use cases that you would look at and, you know, big names in the space, but yeah, things like Fidelity State Street, NASDAQ, you know, sent, you know, good representation to be part of it. And that drew a great piece. So we really went there to listen, not necessarily to say, here's exactly what should be done. But the bill that

we drafted afterwards, became a nonpartisan bill, you know, people across the political spectrum, and kind of wrapping up, it kind of summed up to say, this isn't really a partisan issue. It's whether you actually understand the issue or not. Because people from across the political spectrum would agree, this is what this space needs to have innovation flourish in the United States. So we dropped a bill at the end of 2018 that was really meant to be a public way to get feedback on what we had our work product from that roundtable. And so we thought, oh, we'll be able to get feedback and drop this in February. But we truly had feedback, I mean, just an abundance of input from, you know,

great law schools, venture capital firms, trading desks, startup companies, entrepreneurs, you name it. So we had all this input coming in. And it took really until mid-March before we kind of jailed all that in a way that we could get it redrafted. So it's been there, and we've got a nice file of things that if we do get to the point where we go through true hearings and then markups where amendments could be offered, that we would probably edit the text some to get full consensus to move across the finish line. But we're not yet there. And we thought we had a lot of momentum initially because of Libra, which at the time we were doing this wasn't yet. If it was conceived, it wasn't yet public that it was conceived. So when Libra, you know, got a lot of awareness for this space, unfortunately, it made the whole topic almost about Facebook and less about the underlying tech.

And it's kind of been in between the two. People are worried about the technology or, you know, the Facebook type issues, not really dealing with the regulatory clarity that we need in the meantime. So if Congress had to try to understand the seven-layer security protocol of the Internet, we would have never got the telecommunication back in 1990s. Thankfully, they just said, you know, we're pretty sure this is going to be a thing. We should kind of get out of the way and let some innovation happen. So we're really pushing for that kind of minimal light-touch, regulatory clarity that the United States needs. And frankly, as the people that are listening to this podcast are now watching, know that

capital is fleeing the United States, not really to avoid our laws, but to find regulatory certainty that has been accomplished in places like Switzerland and Singapore. And in terms of the clarity that you wanted to offer with that act, it looks like one of them was that you would propose, or the act would propose that digital tokens would be excluded from the definition of a security. Does that mean that if it were to pass, that holding an initial coin offering would be legal? Well, I mean, an initial. coin offering could be legal today if you complied with, you know, Reg A, Reg A Plus, you know, Part you know, D, there are a number of crowdsourcing. There's a number of ways to do an initial

coin offering that would be fully compliant with securities law. The trouble is that if you want to make a coin, you know, in the sense of a tokenized asset, functional, if it's treated as a security, then it for most use cases becomes problematic because you're essentially engaging in broker-dealer activity and fundamentally changes what a lot of firms are trying to do with the space. So it says that if you meet this four-part test, then you could have regulatory clarity that this will not be considered a security. And that's really been the hang-up at the SEC, the Securities and Exchange Commission.

And it goes back to a 1950s court case, the Howey test, which is really about oranges versus orange groves and the capital formation. And, you know, is it created yet or not? So it doesn't say all tokens will be not securities, but it says if you meet this test, then you'll know it's not a security. Because you could tokenize securities. And what are the four conditions? Yeah, so one, it's already created, so not just proposed. So it exists. Like the network is live.

Right. So it's functional. And then two is that it's on a distributed ledger that doesn't require a third party to transfer assets. So you don't need an intermediary. So we started talking about them initially as open blockchain tokens. But then we said, well, there are people that are doing things that are very similar that would probably meet the same test. And it wouldn't necessarily be on a true distributed ledger or blockchain technology. but clearly a distributed ledger, which people watching this would be familiar with, complies versus a centralized database.

So essentially that means that a private blockchain run by a consortium would not qualify. Their project would not qualify. Is that? Well, because, yeah, it wouldn't necessarily meet this test because, you know, there's a bigger debate about that. And the other piece is the central authority, which is, you know, part three, central authority, you know, can't alter it. So this would, for example, the proposal for Libra wouldn't pass this test because, you know, even though it's a nonprofit, they have a central authority that could, in theory, change the composition of the basket of currencies or even short-term securities that we're talking about. Well, inherently, if you're trading short-term securities to create the value of the asset, then, you know, the underlying product will be a security. So that's the, that's three.

And then, excuse me, the fourth part is that it doesn't represent, you know, an entity. So, for example, I like pointing out file coin, and some people may be familiar with that use case. But think of Apple. If they wanted to launch cloud coin and the token was representative of a terabyte of storage on iCloud, it would be very clear that you're not buying shares of Apple, right? You're buying storage, you know, a service or good, you know. So the representation of the asset can't be, you know, shares of a company. Otherwise, there'd just be a big circle, you know, to say, well, gee, this is a share, but it's not treated as a share.

So it can't represent that. And that's the four-part test. So even if the SEC really, really doesn't like your use case, they still can't say that it's a security unless, you know, mortgages aren't securities either, but you can bungle them in a way that they are now securitized. So somebody could do that to tokens. down the road, you know, to kind of, I guess, highlight how far into the weeds you can get with these definitions. But it's really important. So that's one of the important things that it does.

Another big thing is custody is a big issue. So, you know, how can you give custody to somebody while retaining the private keys? And in theory, you could give those keys to someone else. So it creates a standard for that. And then I think lastly, a couple of those things, the last big important thing is the demand. minimum tax exemption. And while we'd like to go bigger on that, the safe thing is to just treat it the same way you would treat existing currency. And the downside is that conflates all of these tokenized assets that could be represented by a digital token with currency. And the reality is

many of the use cases have nothing to do with currency, but the language that formed in the early days of this space, it's all about currency. And some of my colleagues can't get over that where you're just trying to create a rival to the dollar and destroy the value of the dollar. And, you know, there are some that are aspirational in that sense of what they hope the space can do. But many of the, it's like the internet. I mean, we haven't even remotely tapped all the use cases for the internet. So you're clearly in the infancy of use cases for blockchain technology and tokenized

assets. So I'd rather use something else, but because of that confusion. But, you know, if you go to Europe and you're going to go, say, initially to London, need pounds and you're going to need euros, as long as the net is less than $600, you don't end up having to pay taxes. And so that same de minimis exception would apply here for tokens. Yeah. So first of all, the taxation issue is such a huge one for the listeners of this show and just really a lot of people that are involved in the crypto space. And one other thing I wanted to point out is it's so clear that you have a very nuanced understanding.

of this because, you know, just even what you were saying about how just because they come, these different assets can come and this blockchain wrapper doesn't make them all currencies. I mean, you know, that's, it's an obvious thing. And hopefully someday regulation can address crypto assets in that way. But you're right that at the moment, I think you are one of the select few lawmakers who does have that deep an understanding of the space. So one other thing that I wanted to bring up was just a few other aspects about the taxation. One is that it looks to me also like there are certain IRAs in virtual currencies where distributions would not be taxed, which it sounds to me like if you put Bitcoin into an IRA, then you don't pay taxes when you withdraw that money.

Is that correct? Well, it depends on the kind of IRA. So it would really have nothing to do with the underlying asset, in my opinion, initially. I mean, I'm not a lawyer in this space or an accountant. But, you know, you have a Roth IRA and a traditional IRA. So, you know, the money that you put in in a traditional IRA is tax deferred and you don't pay taxes until the end. And the money that you put in a Roth is money that's already been taxed. And so they're treated differently.

Okay. Yeah. And a couple, one other one that caught my attention was a tax exemption for exchanges of virtual currency, which made it sound like crypto to crypto exchanges would be tax free, which I think would excite a lot of the traders in the community. Yeah. Is that correct? That's right. So, you know, if you think about real estate, people, it's still, it's like section 1031, but you'll talk about a 1031 exchange. and it's, it really treats it as an asset.

And when you do a like-kind exchange, then you can net out the tax. So if you, the easy case is if you're, you know, say, taking, you know, $100,000 or a million dollars, and you're buying something that's, you know, $200,000 or $2 million, you can roll that in. You still end up with issues when you're going down the latter in terms of paying out a net gain because it's a net issue. But it still could minimize it. Generally, it's done when you're taking. something of value and exchanging it for something more and putting some additional, you know, equity or leverage into the deal. And then one last piece of this is, you know, this, what you

proposed intersects with what SEC Commissioner Hester Perse proposed in terms of her suggestion that there would be a safe harper for token issuers. And I was curious to know what your opinion was of her proposal. I think Esther Perth and I are nearly 100% aligned in this space. So I think she would make an excellent SEC commissioner. Okay, great. Well, she's already on the board. I think she would be a great chair.

I feel like it's pretty rare to get such a strong opinion from a politician. So I take it that's something you feel strongly about. Okay, so now we've kind of gotten through most of that pre-pandemic backgrounds. But actually, well, one last piece is so before all of that, like, at the time, you know, this past winter, you know, when we thought we were going to do this the first time. What is, what was the status of the Token Taxonomy Act at that time? Like, how likely did you think it was to be passed in 2020 back in the winter? Yeah, I think the, the coalition is not partisan.

So we have a wide range of folks. Unfortunately, some of the chairman of the committee changed. And so clearly the most vocal opponent of this space in Congress. is Brad Sherman. And Brad Sherman's a Democrat from Los Angeles, and now he is the chairman of the Capital Markets Subcommittee. So near the end of the year, after Elijah Cummings died, Carolyn Maloney moved out of our committee's chairmanship for that subcommittee

and became chairwoman of the House Oversight Committee. So that created the opening, and Brad Sherman's the most senior Democrat. So he became the in that subcommittee. So he became the chairman of the capital markets subcommittee. And he famously also proposed outlawing cryptocurrency. Yeah. Did that go anywhere? Thankfully, no.

However, he continues to say that the only reason to own cryptocurrency is to launder money or evade taxes. And sometimes more pejorative things than that. like fun terrorism. So, you know, it's safe to say that as long as he's in that chairmanship, it's going to be a challenge to move legislation. Thankfully, Chairman, our ranking member, Patrick McKinney, is very pro-Cry, very pro-the-space. He hasn't endorsed this particular bill.

But I think in general, as ranking member, he tries to avoid those things, particularly things where there's still a healthy debate on. and so it doesn't kind of tip his hand for lots of things. I think he might not support it 100%. He's got a few ideas. And so that's where I say when you gather the ideas that are coming in, you know, we might see it amended somewhat to get across the finish line. And another thing, I was encouraged by, you know, Kelly Loeffler in the Senate.

I mean, she clearly understands the space coming from, you know, her background. And then in Wyoming, a state that's really been phenomenal for crypto and tokenized assets, blockchain broadly, heavily due to Caitlin Long and the state legislature out there. But Cynthia Loomis is likely to be the next senator from Wyoming, and she's very strong on the issue as well. So hopefully we'll have knowledgeable allies in the Senate that will help us get momentum in a bicameral way

and get this across the finish line. And the last I would say is, you know, just because, you know, Congressman Sherman is in a very influential position on this, doesn't mean that he will carry the day. So, you know, Maxine Waters and her staff have been, you know, attentive. They've listened. We've got a Fintech task force now. And so, you know, Congressman Foster and Congressman Lynch have paid attention to it.

Now, Congressman Tom Emmer as a Republican is leading the Republican side. And, you know, he clearly understands the space. And so I think there's some opportunity for. momentum. But yeah, I mean, on virtually every issue, as you've alluded to, we've been disrupted by, you know, a health pandemic and now really a lot of attention to some civil unrest. I think, you know, a lot of, I mean, near uniform concern over, you know, excessive force used against people broadly. And, of course, most recently, George Floyd. Yeah. And so before.

we move on to those issues, I do want to also mention that Congressman Patrick McHenry was on this show. And he at that time talked about something new that he was proposing called the Financial Services Innovation Act. And it kind of would create something similar to a sandbox, which he was calling permanent beta testing, which was also an interesting idea. People can listen to that episode for more information on that. And also I did do an interview with Governor Mark Gordon of Wyoming. And certainly Wyoming is really out front and center. And I've also discussed Caitlin's, Caitlin Law's Avanti Bank, which is going to be launching probably sometime in the next year. All right. So in a moment, we will discuss taxes and, well, not taxes. Sorry, we cover taxes. China, Libra, additional dollar, COVID and more. But first, a quick word from the sponsors who make this show possible. Kelman Law is run by True CryptoGs and based in New York and Taiwan.

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crypto purchases will be waived for the next three months. Second, you could get up to 10% back by using the MCO visa card on food delivery and grocery shopping at merchants like Uber Eats, McDonald's, Domino's Pizza, Walmart, and more. Don't have a card yet? Buy gift cards on the crypto.com app from merchants like Whole Foods, Safeway, Burger King, Chipotle, Papa John's, Domino's, and more. And get 20% back on food and 10% back on groceries. This is a global offer, so check out which merchants are available in your country. Download the crypto.com app today. Back to my conversation with Congressman Warren Davidson. So now let's talk about the pandemic and also the record high unemployment and all these protests.

So, and of course now we've had we have this election coming up. So given all those things, how has that changed any of your strategy around, you know, trying to move some crypto-friendly regulation forward? Well, as you saw in, well, some of your listeners or viewers now may have noticed that there was a reference in one of the bills that had no momentum to, you know, a central bank digital currency and research there. So in this space, obviously some people view central bank digital currency as disruptive to, you know, private efforts. and some people see it as an accelerant. Either way, China's moving forward aggressively with a central bank digital currency. And so, you know, we're going to be following whatever happens in that space.

There's really not a lot of likelihood we'll build enough momentum to be doing it concurrently, at least soon. So, you know, we'll see how that plays out. But that was one of the references in the bill. And then, you know, like I said earlier, a lot of the energy really has gone to trying to create economic stabilization as as Congress recognized that, you know, you would have massive disruption to the economy. And the stabilization's gone pretty well in light of that. I mean, massive unemployment, but directionally, the funding from the payroll protection plan, for example, which kept as many people as possible in their payroll, as that's kicked in,

you're starting to see people brought back to work and the unemployment number are already trending down from the peak. And so you saw the Fed step in with a lot of monetary policy. And that created a lot of attention because this isn't money that the federal government's really borrowing. We're effectively printing it, you know, altering the ledger, so you say. And of course, that would be considered highly inappropriate in a tokenized asset, right? You've got the central bank editing.

the editing the currency. We're going to dilute the value of your assets. And that's exactly what's happening to your U.S. dollars. And so it highlights exactly why Satoshi Nakamoto drafted the white paper to explain Bitcoin. So you really, it sounds like you're, you're not a fan of the way that this is being handled. And is it, is it fair to say that you would trust a system more like Bitcoin that had kind of a programmed monetary policy?

Well, I think, you know, to say that I'm not supportive, look, I voted for the CARES Act, which, you know, was $2.2 trillion. I mean, you look at the alternative was really you don't think you should intervene in this. And so, you know, that highlights where some people in the space don't support central banks. I think a central bank has a role. But I do think it's cautionary, you know, as people still say, oh, we should print another $3 trillion and another. The modern monetary theory people that believe if you have a central bank, you can just keep printing. You know, that's not what history shows. And frankly, the logic of it is that you can just dilute the value of everyone's money.

And there's no consequence for it. And that's completely irrational. So people in the crypto space and obviously Bitcoin fans, will see the fallacious argument for what it is. But I think if you had Bitcoin as your national currency, you would see the lack of flexibility that would provide for a central bank in a situation like this. I view Bitcoin personally, kind of like digital gold versus a true currency.

I think it's a great store of value. I don't currently own. I don't own any personally. I think given the role and how vocal I've been as a legislator about this space, that it would be inappropriate. for me to do so, though not technically a violation of the rules. But I think that when you look at the challenge for it, it's highlighted that in the space, one of the things that's really important to me is central authority and the ability

to do true permissionless transactions. So Bitcoin can do that, you know, in theory, all the way. but in the U.S., it's heavily regulated by, you know, Bank Secrecy Act, any money laundering, know your customer provisions that require a lot of data collection about the on-ramps of how you come into owning the assets. So, you know, our country constitutionally is supposed to have privacy, not secrecy, and that's a tough balance. And in our financial transactions in the U.S., the Fourth Amendment's been heavily eroded.

So I think this space really, whether it's, you know, the form that it takes is incredibly important. And that is really a lot of the tension between people that say, we want to, I mean, some of the, some of the, some of the, my colleagues literally want a back door so that they can see all the identity of everyone. And even some want to note where they can approve or deny every transaction as the government. And essentially, that's playing out. And that's part of why Facebook was, you know, timely in their Libra discussion is, do you really want someone to filter your content in the same way, let's say Twitter is filtering content online right now? Or do you want it to be truly permissionless like cash is? I can take a $20 bill and give it to somebody. I don't need permission from anyone.

We just need to agree. I'm going to give you $20 in exchange for what you do. and there's still consequences if you do that for things that are illegal, but you don't have to get permission from a central authority or a third party to be able to complete the transaction. So I think that's the healthy tension that's going to continue to exist in the space. And it's highlighted every day in our dialogue. And some of that, when you think about COVID-19,

people really wanted to have all the identity of everything to really. open the economy. I mean, one of the proposals was, and so I've been on the president's task force for reopening the economy, and one of the proposals was that you would download a digital certificate to your phone every day, and if you tested, you know, negative for COVID-19, then your certificate would be renewed for 24 hours. But effectively without that, the default condition is you're in house arrest. That's a fundamental change to American society. permissionless systems are things that embrace America's society and culture. I could see a system like that working in, say, China, where the culture is different.

In the United States, it's a little ironic that we've been so slow to embrace things that other places that don't have our history of freedom and permissionless activity embracing. So I hope that we can kind of turn back and look at some of the core. characteristics of cash, for example, and create that same feel with our payment systems. Well, gosh, there's so many things in there, but I think maybe the main thing I want to ask you is just, so do you feel that COVID now presents an opportunity for the government to take advantage of this technology in some useful way? Or, you know, earlier when you mentioned how that digital dollar was put in that bill, but it didn't go anywhere, you know, what were the arguments on either side. And was your thinking that now was the time maybe to try to use this

technology, you know, in the midst of this emergency, because it is faster than traditional payment rails? Well, I mean, I've been a fan of using the space since way before this. So it just highlighted the, gee, wouldn't it be great if we could just, you know, move money this way. And, and, you know, as individuals get payments, I mean, the Treasury was fairly efficient in people that already had their accounts on file, moving the money directly into people's accounts, but not everyone did. So they were so efficient that they sent cash to dead people. So hopefully there would be some level of identity that, let's not do that. So there were some flaw. They tried to go very fast and they went fast, but they found some errors. So I think a lot of the issues that would

make that system function come together like identity, right? And, you know, The other piece that is very popular in this space is unbanked people. So it's hard for the Treasury to move money to somebody who's unbanked right now. And a lot of the appeal of crypto is that your phone or USB drive, you know, some digital wallet, however it functions on your hard drive on your CPU. But a digital wallet could effectively be your bank if you've got, you know, proper structure to it. So that could obviously be way faster. Yeah, but are you going to try to, you know, use this opportunity provided by the pandemic to

do anything or do you feel it's, it's maybe, you know, just something we need to keep building and working on? Yeah, I mean, Rahm Emanuel and others have made famous, never let a crisis go to waste. And I'm kind of in the other theme in this sense is, you know, As someone noteworthy said, it's always the right time to do the right thing, Martin Luther King, and I think that's fitting on all sorts of fronts right now. All right. Well, so you did also mention China that country has begun its pilot for the DCEP, which is its digital

currency and payment system. And it's also unveiled a very comprehensive blockchain initiative that really is almost as ambitious as the Bell and Road initiative. And in your press release for the Token Taxonomy Act, you even referenced the fact that Xi Jinping has said that blockchain technology is 10 times more important than the internet was. So given the fact that they're kind of already working on this and the U.S. is still mired in dealing with the virus and all this record unemployment and all these other things going on, are you just concerned in general about the U.S.'s ability to stay competitive when it comes to this technology?

Yeah, absolutely. And look, the way China is trying to do this is, you know, different than a permissionless system. So my concern is that we not copy China's system. I read an article during the pandemic that was concerning to me because they said, you know, on speech, China got it right. You know, we need the government to be the arbiter of truth. Wait, who said that? It was an article in the 11th. Atlantic. I wish I could attribute the professors that read it. And I'm like, I'm a no on that one.

And it's the same. We don't want that to happen to our payment system either. But of course, China is implementing such a system. And as they're going into large parts of the world and heavily into Africa, you know, ways to connect their structure. to unbanked people is a really big deal. And I think the other piece is when they can do that, they truly do have a rival to the U.S. dollars. So, you know, the last time the planet had this much debt was after World War II. And that led to the Bretton Woods Agreement that locked in the United States as the world's reserve currency. And, you know, post this pandemic, post this, the world is going to have a massive amount of debt.

And unlike World War II, where we, largely didn't have debt. I mean, we had a lot from World War II, a peak level for us, but compared to lots of the rest of the world, our currency was viewed as the strongest. And I'm not positive that's the case. And when you look at whether it's China, Russia, or even Christine Lagarde at the European Central Bank, they've been longtime advocates of creating rivals to the U.S. dollar, whether it's a different currency, a synthetic currency, basket of currencies approach, as LaGuard had proposed when she was at IMA, International Monetary Fund. So, you know, I really hope that we don't, you know, move forward in a way that not only lacks what China and other parts of the world are doing, but ultimately sees us undermine one of our core strengths, which is we are the world's reserve currency.

It's great for our economy. It's great for our fiscal policy, our ability to get debt at affordable prices. And it's actually very essential to our national security programs. So we don't want to undermine that. We should be moving with fintech instead of lagging. And unfortunately, we're lagging. Given that China's forging ahead, the U.S. appears to be dragging its feet when it comes to a central bank digital currency. Would you say that Libra then simply because Facebook is the only entity on Earth that has a larger population than the population of China?

that that is sort of going to be the counterweight to the dominance of DCEP? I mean, it could be, but fundamentally, let's look at Libra. I mean, it might get a lot of support from Europe. Frankly, it was, I don't know if the intent was to replicate what Christine Lagarde had proposed when she was at the IMF, but the core premise of Libra is essentially a synthetic currency. It heavily, to me, it looks shocking. shockingly similar to the proposal she had as a synthetic currency.

So that would have a lot of appeal to a number of countries. And frankly, to a lot of global corporations, when you look at the foreign exchange market, Forex market, currency risk is one of the biggest hedges. It's a huge market. So synthetic has an appeal to a lot of folks. Right. But I don't know if you saw that they did change the plan recently to, you know, have a different series of paper points in each place.

Yeah. So I'm following that. And, you know, I think that's a good way to accelerate what they're trying to do. I don't know that they've given up their end goal. They still want to keep their Libra Association and do it. But they also said that if a country, if they go into a country, they would set it up as a stable coin. And if a country set up a central bank digital currency, then their stable coin would go to the central bank digital currency. So I think they're trying to stay very compatible and build momentum behind their project and idea.

and it certainly has the market share and the mine space and already downloaded and installed on literally billions of devices. So, you know, it could really be a thing. So we'll see. Yeah, it's interesting. The hostility we saw from lawmakers in a way, combined with their reluctance to maybe move forward on a U.S. Central Bank digital currency, could. actually accelerate Facebook's dominance in this space. And actually, well, one other question, do you feel like Facebook's change in strategy has appeased

those lawmakers who were hostile to Libra earlier? Not entirely. I mean, it takes a little bit away by saying their U.S. product would be a stable coin. But when you look at the piece, you know, settling transactions and things that aren't U.S. dollars, for people like Brad Sherman will inherently undermine the dollar. And I am a little concerned, again, because so much of the top line attention goes to the currency issue and monetary policy concerns that while we're dithering on this topic and it's incredibly important, we're not providing any regulatory clarity for the nearly infinite number of potential use cases that don't involve payment systems or currencies. They're simply digital representations of goods or services or commodities or could be securities.

I mean, you could even do securities and shares more effectively in lots of cases with tokens. I mean, you could effectively have bearer bonds represented in this space. So there is so much potential for this that I think the currency debate, if we could even park that, We would do a lot of good for our economy and for innovation in the United States of America if we could provide that certainty for everything but currency and payment systems. And also to discuss the U.S. Digital Dollar a little bit more, you know, we have former CFTC Chairman Chris John Carlo, who's proposing one. He's obviously a very credible person. And do you see kind of the weight that he has influencing anything and, you know, improving or increasing the receptivity that various people in the government have to the idea of a digital dollar?

Yeah. I mean, I think he was a very credible person to lead this initiative. And, you know, when the Internet was forming in the 90s, you know, building momentum in the 90s, not really forming, you know, the established media company. were very slow to recognize how disruptive this idea could be. So in a lot of ways, when Congress passed this light-touch regulatory clarity in the 90s, there wasn't a big lobbying effort to preserve the status quo, right? And so it was seen as this blue ocean, blue sky, whichever illustrators you want, total space to be able to go into and innovate and create.

And, you know, whether you're talking central bank, or traditional banks or payment processors, payment systems, they all are very attuned to how disruptive this technology could be to their space. And so somebody that can truly speak that language and understand it, balance the relationships like he can, I think was a very helpful thing. But it's still facing a very entrenched status quo that's working hard to keep their current competitive advantage. And frankly, as we continue to delay in Congress, a lot of private sector companies,

some of the biggest players in the space are racking up patents to be able to lock out small, early stage innovators and, you know, trying to essentially dominate it once they do get certainty. So that's also unfortunate. So it sort of feels like if you just tie all these trends together, it kind of paints a bleak picture. you know, what we were discussing earlier about what China is doing with DCP and how it's using its leverage in Africa also to, you know, build, I guess, dependency on its currency there. And if it is doing that in a way that's reaching the unbanked and also does it in a way with blockchain technology where this money, I think this version of money will simply be used more the way that now with the Internet, you know, we message people on our I messages and our what's. and our Facebook Messenger and Twitter. And, you know, I just feel like once this technology really gets going to be a lot more transactions. And if that's happening on DCEP rails, that just

reduces the power of the U.S. dollar. So when you combine that with kind of just simply the fact that the U.S. dollar does obviously enjoy global reserve status at the moment, which kind of leads to a sense of complacency, do you feel that the U.S. status as superpower, I guess, in a way, could be disrupted? Well, I mean, we're going to stay a superpower. I mean, you know, we're, even if only militarily, I mean, our economy is the largest in the world. Our market's the most functional in the world.

You know, our military is the most powerful in the world. Our intelligence and surveillance systems are unrivaled. So, I mean, we will clearly be a superpower. And frankly, we should spend a little less energy worrying about being a superpower. and more about doing the things that resulted in that, which was, you know, providing the world's best market for goods, services, intellectual property, capital formation. And when we do those things, fundamentally the rest is going to take care of itself. And I don't know, maybe we can, you know, not swander resources in endless wars in more places, but that's a separate topic. But I think when you look at China, for example, you know, the way they've gone to tie the pandemic,

piece back together, the way they've gone about their activities historically and particularly in this pandemic have really alienated a lot of countries. So, you know, they were literally leveraging their PPE personal protective equipment stockpiles to say, well, we can get you some of these, you know, N95 masks and protective garments for hospitals and ICUs. If, if, if, if you agree to use Huawei for your 5G implementation, right? And, you know, Western countries in particular, like, you've got to be kidding me to be polite about the reaction, right? And as people seen how China wanted to leverage their power, I think it's caused a lot of

people to check up. And, you know, let's not forget that when China became part of the World Trade Organization, they promised to become a market economy. And, you know, that was in the 90s. And so far, zero countries recognized China. as a market economy. Every country would recognize the things that China has done with respect to intellectual property theft, with respect to blocking market access, or if you do get access, you have to,

you know, share the intellectual property and ownership of your company in exchange for that market. And then they don't want to agree to the same sort of reciprocal things. I mean, in fact, to be listed on U.S. exchanges, Chinese companies don't have the same audit standards, for example. So they've really been treated separately. And I think not just in the United States, but around the world, people have kind of grown weary of that, and now they're much more cautious. So those activities could delay China's ability to move forward on, you know, whether it's digital currency or trade or some of their other Belt and Road initiatives.

Interesting. I just wonder what leverage some of these other countries, though, have to, you know, not do business with China. I guess that's where I was going with that questioning. I just worry that because of the power that they'll build. And I can't predict. I'm just surmising that that will give them. I mean, you already see it with how they are influencing huge actors from the NBA to the WHO to basically get those organizations to

censor themselves based on what China's priorities are. And what they're using is their financial. financial power, you know? So I just worry about them building even more financial power. Right. And you look at American companies who would never accept that from the American government, but in exchange for market access in China, they've, I mean, you had Google employees threatened to quit or quit if Google cooperated with the Department of Defense. Yet Google in exchange for market access in China has done all sorts of things, right? So, you know, it is an interesting paradox. But I think because of that, you'll see supply chains shift, not just American supply chains, but a lot of supply chains will be disrupted.

And China has built this power because, A, they committed to be a market economy, and they provided, you know, a great place to innovate. They have a huge potential market. But they've really made it so that a lot of other countries can't really get that without undermining their own futures. And so, you know, that's kind of a separate topic. in the sense of how China's done it. But, you know, it may delay, it may give us a little bit of time on the currency side for the U.S. to kind of get our own house in order. But again, you know, my fear is that we get so bogged down with the currency aspects

that we don't really provide the certainty for the, you know, thousands, tens of thousands, you know, massive number of use cases that don't involve currency. And what do you say to those who are nervous that moving to digital currency, could hurt the U.S. government's ability to influence foreign actors in terms of imposing sanctions, et cetera? Well, I think if you're concerned about that, it's odd that you would want to stay passive and watch other countries, like China, become the default system, right? Or, you know, other domiciles like Switzerland, become the regulatory entity or nexus, right? London also working very hard to be a financial capital. And I think very smartly offering asylum to all the people from Hong Kong that want to move to London.

And so I think London is working to really, you know, they've always been a large financial market and arrival to New York. And in this digital space, they're clearly outpacing the United States. I mean, the Bank of England has acted to provide essentially two financial firm, fintech companies. the same sorts of things that they're doing for big banks in terms of overnight clearing and funds. So you could, in theory, access the repurchase agreement market as a fintech company in a way that you can't do with the Federal Reserve. So we're a long ways out from that kind of thing happening in the United States. So if you're really concerned about the United States' ability to preserve, you know,

the kind of system that we've used for sanctions and tracking, you know, illicit finance, it seems like you would want to be more innovative instead of more stagnant. You know, we're essentially trying the Sears Roebuck approach to retail, and I don't think that's really smart. I hope it doesn't turn out as badly for us as it did for Sears. I would agree with that. So let's also now just turn to this upcoming election, which obviously is going to be one that many feel passionate about on both sides.

And it seemed, you know, since you had both Republicans and a Democrat sponsor, the Token Taxonomy Act, that that had bipartisan support, do you feel that any of this stuff going on with the pandemic or the record unemployment at any of this or the social unrest that has in any way affected, you know, the bipartisan nature of this legislation? you know, in general, how do you feel the outcome of the election could affect crypto-friendly regulation being adopted in the U.S.? Yeah, so with respect to this legislation, my hope and for a lot of things, even the news cycle, you know, if you watch the news, you'll see, you know, polar opposite versions of the same event, depending on which channel you flip to. And I keep hoping what will be popular is kind of a just-a-fax approach. Like since you couldn't be here, here's what happened. And, you know, and, you know, bipartisanship on some of these kinds of things will become trendy again versus partisan messaging bills. I think the country in a lot of ways is hungry for that. And so my hope is going into the election cycle that a bill like this, which is not partisan, could get some momentum to show that, hey, there really is a way for us to work together on some issues.

And frankly, a lot of issues like that in the financial services space aren't partisan. It just doesn't get much press, right? So I hope that we can find a way to work together to get this and a lot of other things done and maybe even get some news for the fact that we do get along and work together on a lot of things. I'll give you that news. Yeah, it'll be great, I hope. And eventually, I'm sure we'll get there, but maybe not before November. But, you know, going into November, one of the biggest things for the House of Representatives,

you know, every member of the House is up every two years. So we're all up for re-election. And the House is a completely majoritarian body. So if you have control, your party becomes Speaker, then you are the leaders of all the committees. And so the leadership really would matter in the sense that, you know, if the Republicans flip the House, then, of course, Brad Sherman wouldn't be the leader of the Capital Markets Subcommittee. In theory, Patrick McKinney would be, if he stayed in his current role, the likely chairman of financial services.

And so he would be more likely to be pro this legislation than Maxine Waters has shown herself to be so far. But, you know, it's not clear, A, that that will be the outcome. And B, that we would still get momentum on it because you'll see it. But it seems more likely in the House that that would be the case. And then, you know, we'll see with the Senate. We'll see with the presidency. It's not a partisan bill. So I don't know.

I don't know if, you know, Joe Biden or Donald Trump are more or less likely or a player to be named later, right? So there's a lot of speculation about where the election cycle is going at this point. Right. Well, that aside, what helped you wish you had from the industry to help get any kind of crypto-friendly regulation push forward, whether it's the Token Taxonomy Act or something else? You know, I think the biggest thing that I would love to have would be a consensus that we should have a real hearing focused on, you know, this space. And even if we have to set aside all the payment systems and currency issues for the focus of the hearing, that we had a hearing about it where the token taxonomy act was a bill that's noticed for the hearing. So we could have, you know, one or two hearings that cover this in depth. and then we could go into a markup.

And that's the path that most legislation follows. You have a committee hearing. You go to a markup where it's an internal meeting, no outsiders, but Republicans and Democrats and others in the committee with a chance to amend. And then you vote on the bill as amended. And again, I think we have broad bipartisan support for this legislation that would only be made more broad and more bipartisan by going through that markup. piece where people could offer, you know, their amendments. And hopefully that would result in a

product that's functional. That's also how some legislation passes, but the industry goes, what happened here? We thought we had something. So, you know, hopefully it comes out in a usable form. But I'd love to that happen. And I can't see a downside to doing a real hearing about it personally. Right. Hopefully it wouldn't end up being like the New York Bit license, which obviously was something that the industry really felt had been imposed from above and did not take into account their wishes. So before we close up, I had a fun question for you, which is I wanted to address that moment in the Congressional hearing on Libra when you asked Meltem de Mirrors of coin shares to explain the difference between shitcoin and Bitcoin. And it appeared that maybe ever so slightly there

was a little smile on your face. Did you plan to use that word shit coin? And did you do it, like for the kicks of having it in the congressional record? Well, I didn't go into the hearing, planning to do it. And I had not spoken to Meltem before. I never actually personally met her before that hearing. And so I was listening to her debate and I thought, I might be able to broach this topic, but I hadn't thought whether I'd actually use the phrase shit coin. And, And I thought, you know, this is the most effective way to illustrate it. And I think she's going to be able to go there. Well, so it's funny that you sort of clued in on that without having known her because when she came on my show, there was just more profanity in that show than in like any other show.

And she used that phrase. Specifically, she actually talked about what she called the shit coin waterfall. and that had to do with ICOs. And I think if I remember correctly, I think we even named the episode. We had a shit coin waterfall in the title. So she's very well known for using that word. So it's kind of amazing that, excuse me,

that you didn't know that and you didn't plan it. I didn't even know that she had used a toilet as a prop at an event at another time. But I could definitely sense that she clearly was in the Bitcoin camp. And the, yes, many of these other things are, in fact, colloquially known as shit coins. Right. Right. Well, that was just such an iconic moment. It will go down in the history books.

Okay, great. Well, where can people learn more about you, your work in the House and the token taxonomy act? Yeah, so our official website is Davidson. Thathouse.gov. People can go there and see bills that we've sponsored, co-sponsored, press releases, sign up for our newsletter. and all of our social media accounts. Perfect. Well, thanks so much for coming on Unchained.

Thanks very much. I really appreciate what you do. Thanks so much for joining us today. To learn more about Congressman Davidson, check out the show notes inside your podcast player. Don't forget, you can now watch video recordings of the podcast on the Unchained YouTube channel. Go to YouTube.com slash C slash Unchained podcast

and subscribe today. Unchained is produced by me, Laura Shin, with help from Fracton Recorder. Anthony Yun, Daniel Nuss, Josh Durham, and the team at CLK transcription. Thanks for listening.