WEBVTT - Does the Senate Reg Bill Scratch The Itch?

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<v Speaker 1>I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News.

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<v Speaker 1>And this is Bloomberg Crypto, a daily Bloomberg I Heart podcast.

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<v Speaker 1>It's Tuesday, July five. In June, Senators Kristin Jill Brand

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<v Speaker 1>and Cynthia Lumas introduced a sweeping Senate bill that would,

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<v Speaker 1>if successful, attempt to regulate crypto assets. I don't think

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<v Speaker 1>any bill can satisfy everyone, but I think this is

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<v Speaker 1>a really great start because our goals are simple. We

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<v Speaker 1>want to create safety and soundness in the American market.

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<v Speaker 1>We want transparency and accountability, and we want to have

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<v Speaker 1>consumer protections. Influential crypto insiders hailed this proposal as a

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<v Speaker 1>great starting point, a reception that suggests it might be

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<v Speaker 1>perceived as relatively friendly to the people it's supposed to

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<v Speaker 1>be regulating in the digital asset community. Hillary Allen, a

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<v Speaker 1>law professor at American University, is among those who think

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<v Speaker 1>that the proposed legislation just doesn't go far enough, especially

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<v Speaker 1>when it comes to consumer protection. She joins me now,

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<v Speaker 1>Professor Allen, thank you so much for joining us today.

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<v Speaker 1>It's a pleasure to be here. Thank you for having me.

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<v Speaker 1>You have I think if ever, somebody were to invent

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<v Speaker 1>a profile for somebody who feels, you know, like the

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<v Speaker 1>right person to comment on financial regulation, it does seem

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<v Speaker 1>to be the one that you have. You have written

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<v Speaker 1>a book about fintech, You are a professor who sort

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<v Speaker 1>of studies these things professionally or academically at least, and

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<v Speaker 1>you've had some pretty incisive commentary in the past couple

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<v Speaker 1>of months about your concerns over you know, financial stability

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<v Speaker 1>and the threats that crypto appears to pose to financial stability.

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<v Speaker 1>Can you say a little bit more about this proposed

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<v Speaker 1>legislation from these senators and like what your first, second,

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<v Speaker 1>and maybe third reactions have been to it. I used

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<v Speaker 1>to work for a law firm partner who if your

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<v Speaker 1>work was really arable, he wouldn't try to salvage anything

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<v Speaker 1>from it. He would just start and send it back

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<v Speaker 1>with something at the top saying start over. And that

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<v Speaker 1>was my initial reaction to this bill. There's not a

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<v Speaker 1>lot in here to salvage. The second reaction was, you know,

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<v Speaker 1>what are the politics going on behind this? It's very curious.

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<v Speaker 1>I've never seen an industry so happy with proposed legislation

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<v Speaker 1>that's intended to regulate them. It's almost like champagne corks

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<v Speaker 1>were popping all over the crypto industry. So those are

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<v Speaker 1>sort of my broad brush reactions, and then it got

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<v Speaker 1>into sort of the nitty gritty of the problems, and

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<v Speaker 1>they're varied from taking jurisdiction away from the sec over

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<v Speaker 1>things that already fit the definition of securities, to putting

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<v Speaker 1>stable coins in the banking environment and potentially implicitly putting

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<v Speaker 1>deposit insurance and government guarantees behind stable coins, to creating

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<v Speaker 1>regulatory sandboxes that would sort of reverse pre empt federal

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<v Speaker 1>legislation intended to protect investors and the stability of our

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<v Speaker 1>financial system. It's a lot of problems. Well, you've named

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<v Speaker 1>three very specific things that I'd love for us to

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<v Speaker 1>break down a little bit, and let's let's start from

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<v Speaker 1>depositary insurance and your concerns about that, because you know,

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<v Speaker 1>this is something that's often held up as all right,

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<v Speaker 1>if I'm a consumer, if I have money in a bank,

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<v Speaker 1>I don't personally qualify for a two and fifty deposit insurance.

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<v Speaker 1>I do not have any bank balances that are that

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<v Speaker 1>are that high. But you know the idea is if

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<v Speaker 1>my bank were to go under I would at least

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<v Speaker 1>be protected up to a certain amount, and there's no

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<v Speaker 1>comparable protection for folks who may have their assets in crypto.

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<v Speaker 1>Why is the way it's constructed that protection is constructed

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<v Speaker 1>in this bill? Why is that a concern for you? Well,

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<v Speaker 1>first of all, you know, I do want to say

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<v Speaker 1>that my heart goes out to the people who are

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<v Speaker 1>losing their money. You know, Celsius has just suspended redemptions

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<v Speaker 1>and a lot of people are losing their shirts. And

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<v Speaker 1>I'm seeing comments on Twitter saying things like, but this

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<v Speaker 1>is insured, right, and people don't understand that they don't

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<v Speaker 1>have any guarantee or insurance, and that is heartbreaking for

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<v Speaker 1>the individuals. But what we need to think about is

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<v Speaker 1>sort of the big picture when we ensure something. And

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<v Speaker 1>there are downsides to deposit insurance. So when deposit insurance

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<v Speaker 1>was introduced in the nineteen thirties after a series of

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<v Speaker 1>banking panics, there were a lot of economists who were

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<v Speaker 1>worried about it because it can incentivize some bad behavior

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<v Speaker 1>on behalf of the banks, because they know that people

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<v Speaker 1>won't be paying attention, they won't be watching their deposits,

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<v Speaker 1>and so you know, the banks can take more risks

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<v Speaker 1>knowing that they can pocket the upside and the downside

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<v Speaker 1>will be covered by the deposit insurance. So in the end,

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<v Speaker 1>notwithstanding those concerns, they decided to implement deposit insurance anyway,

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<v Speaker 1>and I think that was the right decision because of

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<v Speaker 1>the importance of banks to how our broader economy functions.

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<v Speaker 1>But if we're talking about stable coins, people keep talking

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<v Speaker 1>about these being used for payments. They're not used for

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<v Speaker 1>payments for every day goods and services. They're not very

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<v Speaker 1>useful for payments for every day goods and services. Where

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<v Speaker 1>they're being used is to speculate in the decentralized finance space,

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<v Speaker 1>which or defy um, which is a fancy way of

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<v Speaker 1>saying that they have created on the blockchain equivalence of

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<v Speaker 1>a lot of financial products and services that we already have.

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<v Speaker 1>But because they're on the blockchain, they're operating in an

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<v Speaker 1>unregulated way. So if we are ensuring stable coins, if

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<v Speaker 1>we're putting government guarantees behind stable coins, were essentially ensuring

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<v Speaker 1>people speculative activity in the defy space. And that's not

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<v Speaker 1>you know, building products and services. That's not employing people

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<v Speaker 1>in the same way that we think of you know,

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<v Speaker 1>traditional economic growth, so very loath to put deposit insurance

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<v Speaker 1>behind this very speculative space. So if I'm hearing you correctly,

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<v Speaker 1>it's less the idea that insurance equal bad and more

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<v Speaker 1>the idea that insurance equal risk reward for an activity that,

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<v Speaker 1>as you're describing it, doesn't seem to qualify to you

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<v Speaker 1>as like economically valuable exactly. That's a great way of

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<v Speaker 1>putting it. You're essentially giving people a safety net to

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<v Speaker 1>gamble um in a way that doesn't create productive use

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<v Speaker 1>for the rest of the economy. Are there other instances

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<v Speaker 1>in this bill? You know, because you you name a

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<v Speaker 1>couple of other things where that's where your reaction is

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<v Speaker 1>coming from, that these are creating incentives that may sow

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<v Speaker 1>the seeds of whatever the next crisis is. Absolutely, and

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<v Speaker 1>I've written about this at length, there are so many

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<v Speaker 1>parallels between what we're seeing in crypto now and what

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<v Speaker 1>we saw on the lead up to two thousand and eight.

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<v Speaker 1>The news from Wall Street has shaken the American people's

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<v Speaker 1>faith in our economy. The situation where Lehman Brothers and

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<v Speaker 1>other financial institutions is the latest in a wave of

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<v Speaker 1>prices that have generated enormous uncertainty about the future of

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<v Speaker 1>our financial markets. To be clear, I don't think an

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<v Speaker 1>implosion of the crypto markets right now would cause a

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<v Speaker 1>broader global financial crisis, but that's really about size and

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<v Speaker 1>integration with the broader system, rather than it being safer.

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<v Speaker 1>What we're seeing with crypto is, you know, we're seeing

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<v Speaker 1>just a far reaching complexity that people can't process, and

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<v Speaker 1>that makes panics more likely. It makes systems more fragile

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<v Speaker 1>when you can't see the interconnections of the different parts

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<v Speaker 1>of the system. We're seeing new ways of creating leverage

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<v Speaker 1>because people can create tokens out of thin air and

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<v Speaker 1>then use them as collateral for loans. We're seeing this rigidity,

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<v Speaker 1>this smart contracts, which are really just computer programs but

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<v Speaker 1>they run on the blockchain and they automate transactions. We're

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<v Speaker 1>seeing that rigidity parallel what we saw with mortgage backed

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<v Speaker 1>securities in the lead up to two thousan eight, where

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<v Speaker 1>you know, there aren't the opportunity it needs to renegotiate

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<v Speaker 1>these deals when they're bad for both the consumers and

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<v Speaker 1>for the system as a whole. And we've seen you know,

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<v Speaker 1>a bunch of runs on stable claims in the last

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<v Speaker 1>few weeks that look a lot like the runs that

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<v Speaker 1>we saw on money market mutual funds in the past.

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<v Speaker 1>But to your point, these runs don't seem to have

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<v Speaker 1>that sort of systemic e contagious effect that folks were

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<v Speaker 1>worried about in two thousand and eight. Yet, right, So

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<v Speaker 1>that's the thing. So you know, there's um you know,

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<v Speaker 1>it's a balancing act. You know, you don't want to

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<v Speaker 1>rush and put government backing behind all of this stuff

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<v Speaker 1>now because it won't have the systemic effect I think,

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<v Speaker 1>and it's current iteration. The thing that concerns me most

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<v Speaker 1>is that as this stuff starts to get integrated with

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<v Speaker 1>the traditional financial system, which is happening, then we start

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<v Speaker 1>seeing the tentacles of this stuff spreading into the traditional

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<v Speaker 1>finance broader economy, and then we're getting to a place

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<v Speaker 1>where a bailout might be necessary. So proactively to prevent

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<v Speaker 1>that from happening, I think the most important thing that

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<v Speaker 1>can happen right now is to set up a separation

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<v Speaker 1>between banking and crypto instead of encouraging their integration. Interesting

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<v Speaker 1>We'll be right back with American University law professor Hillary

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<v Speaker 1>Allen for more analysis of the pros and cons of

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<v Speaker 1>this big bipartisan piece of proposed crypto regulation. One thing

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<v Speaker 1>you did mention. You said this on Twitter and one

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<v Speaker 1>of your threads that you haven't paying attention to is

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<v Speaker 1>this idea of taxation as it relates to crypto. Can

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<v Speaker 1>you talk a little bit more about that? Sure, So,

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<v Speaker 1>taxation for any lawyer is terrifying if they're not a

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<v Speaker 1>tax lawyer. Um, it's it's the one thing that you know,

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<v Speaker 1>I teach business law, and I say your one job

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<v Speaker 1>is to make friends with the tax lawyers so that

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<v Speaker 1>you have someone to call when tax issues come up.

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<v Speaker 1>And so the taxation around oundum crypto assets is you know,

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<v Speaker 1>it is a very important issue that a lot of

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<v Speaker 1>the people who are talking about crypto sort of deal

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<v Speaker 1>with as an add on. So, the taxation experts that

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<v Speaker 1>I have talked to said that this carves out a

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<v Speaker 1>incredible it is an incredible sort of carve out and

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<v Speaker 1>give away for um crypto that doesn't exist in other

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<v Speaker 1>asset classes. And so that ties into this broader picture

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<v Speaker 1>of why are we giving crypto more favorable treatment on

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<v Speaker 1>every level than the existing laws accord, Why are we

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<v Speaker 1>treating crypto securities as different and deserving of a lighter

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<v Speaker 1>touch regime than regular securities. Why are we giving more

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<v Speaker 1>preferential treatment to taxation on crypto? And I think it

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<v Speaker 1>keeps coming back to this issue that I think if

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<v Speaker 1>the most charitable reading of all of this is that

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<v Speaker 1>there are a lot politicians that and policymakers who don't

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<v Speaker 1>want to be seen as anti innovation. When I came

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<v Speaker 1>to Washington, I found out that very few, if any,

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<v Speaker 1>members of the Senate had an awareness of how big

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<v Speaker 1>bitcoin and other digital assets were becoming, and that there

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<v Speaker 1>was a vacuum of both interest and knowledge about this topic.

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<v Speaker 1>And yet it was becoming more and more apparent that

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<v Speaker 1>a framework for regulation was going to be needed. What

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<v Speaker 1>this bill really says to me is that policymakers are

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<v Speaker 1>not looking behind the curtain to see what's really going

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<v Speaker 1>on here. So a lot of the technology that is

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<v Speaker 1>being trumpeted as being so innovative is really, according to

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<v Speaker 1>many tech experts, not particularly good. It doesn't scale well,

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<v Speaker 1>it's slow, it's expensive, a lot of its environmentally castle well.

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<v Speaker 1>You have compared smart contracts, for example, which is just

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<v Speaker 1>you know, as you said, contracts that exist on the

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<v Speaker 1>blockchain to mortgage backed securities. You have compared various elements

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<v Speaker 1>of defied to credit default swaps and somebody who used

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<v Speaker 1>to cover both of those things a long time ago.

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<v Speaker 1>I find those analogies very interesting because the big argument

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<v Speaker 1>that their proponents made was this is about better risk mitigation.

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<v Speaker 1>This is about using bleeding edge technology to solve you know,

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<v Speaker 1>novel problems. And when it blew up, they were like,

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<v Speaker 1>except under these very specific circumstances, when everything goes wrong

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<v Speaker 1>at the same time, yep, yep, that's always it. I mean,

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<v Speaker 1>especially if you're someone like me who pays a lot

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<v Speaker 1>of attention to financial crises and systemic risks. It's all

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<v Speaker 1>about the tail events. It's all about the low probability

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<v Speaker 1>who could have seen this happening, very high consequence events

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<v Speaker 1>that are not as rare as people think they are. Um,

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<v Speaker 1>you know, I grew up in Australia and all the

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<v Speaker 1>Swans they are so yes. Indeed, famously refusing the title

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<v Speaker 1>of the book, black Swan exactly what we And this

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<v Speaker 1>is a comment that I've made a lot that It's

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<v Speaker 1>just it surprises me how short memories are that that

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<v Speaker 1>these these lessons that we should have learned from the

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<v Speaker 1>two eight crisis. We have not learned and I think

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<v Speaker 1>part of the reason why people haven't learned them is

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<v Speaker 1>because what used to be is just sort of a

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<v Speaker 1>question of um financial complexity now has this overlay of

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<v Speaker 1>technological complexity. So to really dissect this and see why

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<v Speaker 1>none of this is going to work in those tail events,

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<v Speaker 1>you need to understand both the finance and the tech

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<v Speaker 1>and those are two very um complicated areas, and so

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<v Speaker 1>what you need are both kinds of expertise. And that's

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<v Speaker 1>why I think it's particularly valuable that um uh, Well,

0:13:53.800 --> 0:13:57.280
<v Speaker 1>it started out with I think twenty three leading technologists,

0:13:57.320 --> 0:14:00.440
<v Speaker 1>but then the letter was signed by over fifteen hundred

0:14:00.480 --> 0:14:04.960
<v Speaker 1>other technologists around the world. In a letter to Congress,

0:14:04.960 --> 0:14:12.280
<v Speaker 1>it was said recently they articulated the technological flaws here,

0:14:12.559 --> 0:14:18.360
<v Speaker 1>and I'm contributing my expertise on the financial flaws of this.

0:14:18.960 --> 0:14:21.560
<v Speaker 1>And when you put them together, you see that this

0:14:21.640 --> 0:14:25.240
<v Speaker 1>is an inherently flawed system that isn't fit for purpose.

0:14:25.480 --> 0:14:28.120
<v Speaker 1>This being crypto from your perspective, like the whole thing,

0:14:28.560 --> 0:14:33.280
<v Speaker 1>the whole really the whole thing, um. And so what

0:14:33.480 --> 0:14:35.960
<v Speaker 1>I would really like to see from policy makers is

0:14:36.000 --> 0:14:38.760
<v Speaker 1>not a bill like this that accepts at face value

0:14:38.760 --> 0:14:45.400
<v Speaker 1>the claims of innovation and financial inclusion, but actually interrogates

0:14:45.760 --> 0:14:49.240
<v Speaker 1>those a little before giving away the store on things

0:14:49.280 --> 0:14:52.960
<v Speaker 1>like securities, regulation and tax And I think the financial

0:14:53.360 --> 0:14:58.200
<v Speaker 1>inclusion narrative is particularly pernicious here because we keep hearing

0:14:58.240 --> 0:14:59.840
<v Speaker 1>that this will you know, this will help the emb

0:15:00.000 --> 0:15:02.080
<v Speaker 1>bank to people who haven't well. I mean, Jay z

0:15:02.240 --> 0:15:06.000
<v Speaker 1>and Jack Dorsey just set up a center for educating

0:15:06.120 --> 0:15:10.080
<v Speaker 1>kids in Brooklyn about the benefits of bitcoin. Nothing could

0:15:10.120 --> 0:15:14.240
<v Speaker 1>possibly go wrong, nothing could possibly go wrong. It's just heartbreaking.

0:15:14.320 --> 0:15:17.240
<v Speaker 1>But you know this is rhetoric we've heard before. So

0:15:17.280 --> 0:15:20.000
<v Speaker 1>in the lead up to two eight, sub prime mortgages

0:15:20.040 --> 0:15:23.160
<v Speaker 1>were going to be the thing that helped bring people

0:15:23.200 --> 0:15:25.960
<v Speaker 1>who had been previously excluded from the housing market into

0:15:26.000 --> 0:15:29.880
<v Speaker 1>the housing market, and in the end it was predatory inclusion.

0:15:30.280 --> 0:15:33.160
<v Speaker 1>People lost their homes, lost their money, et cetera, and

0:15:33.320 --> 0:15:35.840
<v Speaker 1>it was the sort of the building blocks for a

0:15:35.920 --> 0:15:39.680
<v Speaker 1>much broader systemic crisis. Right now, as I mentioned, I

0:15:39.720 --> 0:15:44.200
<v Speaker 1>don't think the crypto assets are yet the building blocks

0:15:44.240 --> 0:15:46.680
<v Speaker 1>for systemic crisis because we don't have the integration with

0:15:46.760 --> 0:15:53.479
<v Speaker 1>the mainstream financial system yet. But it's still predatory inclusion

0:15:53.600 --> 0:15:58.080
<v Speaker 1>to my mind, So if you invested in bitcoin after

0:15:58.720 --> 0:16:02.320
<v Speaker 1>December of twenty you would have lost all your money

0:16:02.320 --> 0:16:07.080
<v Speaker 1>by now. And so you know that's that's everybody who's

0:16:07.120 --> 0:16:09.520
<v Speaker 1>invested for the first time, which to be a lot

0:16:09.600 --> 0:16:12.600
<v Speaker 1>of people right there. There have been multiple surveys. I

0:16:12.640 --> 0:16:15.000
<v Speaker 1>was just looking at a couple of these right before

0:16:15.040 --> 0:16:19.920
<v Speaker 1>talking to you today, that between half and seventy depending

0:16:19.920 --> 0:16:22.120
<v Speaker 1>on how you slice it of people who currently own

0:16:22.200 --> 0:16:29.280
<v Speaker 1>bitcoin invested between now and all of them are underwater,

0:16:30.200 --> 0:16:32.640
<v Speaker 1>every single one of them. And when you when you

0:16:32.680 --> 0:16:37.120
<v Speaker 1>start a statistic like that, it really emphasizes that the

0:16:37.200 --> 0:16:41.200
<v Speaker 1>people who got in early on a lot of this

0:16:41.280 --> 0:16:45.400
<v Speaker 1>crypto stuff are going to make a lot of money,

0:16:45.680 --> 0:16:49.240
<v Speaker 1>and it's highly concentrated. This is, you know, the people

0:16:49.280 --> 0:16:52.240
<v Speaker 1>who have been in here since before, there aren't that

0:16:52.280 --> 0:16:55.200
<v Speaker 1>many of them, and a lot of them are very

0:16:55.320 --> 0:16:58.160
<v Speaker 1>very concentrated in terms of wealth. And then the newer arrivals,

0:16:58.160 --> 0:16:59.800
<v Speaker 1>the people who come in basically since the end of

0:17:00.000 --> 0:17:03.920
<v Speaker 1>any twenty um, had smaller investments, but had you know,

0:17:03.960 --> 0:17:07.720
<v Speaker 1>we're not is able to absorb losses, and as I said,

0:17:07.720 --> 0:17:11.200
<v Speaker 1>every single one of them is underwater. Well, on that note,

0:17:11.200 --> 0:17:13.320
<v Speaker 1>Professor Allen. I would like to thank you very much

0:17:13.359 --> 0:17:15.920
<v Speaker 1>for joining me today. You've certainly given all listeners quite

0:17:15.920 --> 0:17:18.360
<v Speaker 1>a lot to think about, and I will make sure

0:17:18.359 --> 0:17:19.919
<v Speaker 1>that they know where to find you on the internet.

0:17:20.960 --> 0:17:25.480
<v Speaker 1>Thanks so much pleasure. You can find Professor Hillary Allen

0:17:25.560 --> 0:17:30.440
<v Speaker 1>on Twitter at prof Hillary Allen. That's Hillary with one

0:17:30.640 --> 0:17:34.320
<v Speaker 1>L H I L A R Y on the next

0:17:34.359 --> 0:17:37.639
<v Speaker 1>episode of Bloomberg Crypto. I'm part of a generation that

0:17:37.720 --> 0:17:40.800
<v Speaker 1>grew up with the Internet, with social networks that long

0:17:40.920 --> 0:17:45.000
<v Speaker 1>predated Facebook or Twitter, and with online identities that sometimes

0:17:45.080 --> 0:17:49.040
<v Speaker 1>felt more authentic than my offline self. Experimenting with who

0:17:49.080 --> 0:17:52.760
<v Speaker 1>you are online, especially if those identities are really different

0:17:52.840 --> 0:17:55.679
<v Speaker 1>from how you present in the analog world, it's not

0:17:55.760 --> 0:17:58.320
<v Speaker 1>a new concept, so it's no surprise that folks are

0:17:58.400 --> 0:18:01.639
<v Speaker 1>using newish technologies like crypto on the blockchain to play

0:18:01.640 --> 0:18:05.200
<v Speaker 1>with their self expression. Some folks are even using blockchain

0:18:05.359 --> 0:18:10.280
<v Speaker 1>enabled structures to monetize these experiments with identity, including their

0:18:10.320 --> 0:18:14.480
<v Speaker 1>gender presentation. For more on crypto and identity, Bloomberg reports

0:18:14.480 --> 0:18:18.200
<v Speaker 1>that Emily Nicole and doctoral candidate and researcher Florence Smith

0:18:18.280 --> 0:18:22.040
<v Speaker 1>Nichols will join me on the next episode of Bloomberg Crypto.

0:18:25.720 --> 0:18:29.119
<v Speaker 1>I'm Stacy Marie Ishmael, and this is Bloomberg Crypto, a

0:18:29.200 --> 0:18:32.440
<v Speaker 1>daily podcast from Bloomberg and I Heeart Radio. For more

0:18:32.440 --> 0:18:35.080
<v Speaker 1>shows from I Heart Radio, visit the I Heart Radio app,

0:18:35.359 --> 0:18:39.760
<v Speaker 1>Apple Podcasts, or wherever you get your podcasts. Email your questions, comments,

0:18:39.840 --> 0:18:42.720
<v Speaker 1>or suggestions for the show to Crypto at Bloomberg dot

0:18:42.720 --> 0:18:46.280
<v Speaker 1>net and you'll find us on Twitter at Crypto. The

0:18:46.280 --> 0:18:50.280
<v Speaker 1>supervising producer of this episode is Vicky very Galina. Associate

0:18:50.359 --> 0:18:53.960
<v Speaker 1>producer is Thy Butler. Just to wonder at is our engineer.

0:18:54.400 --> 0:18:58.280
<v Speaker 1>Original music by Leo Sdrin. Bloomberg's head of Podcasts is

0:18:58.280 --> 0:19:08.239
<v Speaker 1>francescality As