Speaker 1: I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg
Speaker 1: mus and this is Bloomberg Crypto at Daily Bloomberg I
Speaker 1: Heart Podcast. It's Monday, August two. It can feel like
Speaker 1: we hear and say the words crypto and regulation mentioned
Speaker 1: in the same sentence a lot these days. That's because
Speaker 1: there are multiple pieces of proposed crypto legislation making their
Speaker 1: way through the US political machine right now. Representative Maxine Waters,
Speaker 1: who's the chair of the powerful House Financial Services Committee,
Speaker 1: and ranking Member Patrick McHenry want to regulate stable coins.
Speaker 1: Senators Cynthia Lamas and Kristin gila Brand have proposed several
Speaker 1: significant changes to the crypto regulation regime in a build
Speaker 1: that they're calling the Responsible Financial in a Asian Act,
Speaker 1: And earlier this year, President Joe Biden himself issued his
Speaker 1: Executive Order on Ensuring Responsible Development as Digital Assets, which
Speaker 1: basically mandated every relevant federal agency to figure out or
Speaker 1: at least define their position on crypto and of course,
Speaker 1: to identify ways to protect consumer rights as well as
Speaker 1: the rights of investors. Joining me today for a discussion
Speaker 1: of these many complicated pieces of potential crypto legislation in
Speaker 1: the US is Nathan Dean, a senior analyst at Bloomberg Intelligence.
Speaker 1: Very few times in my career if I ever heard
Speaker 1: did an industry wants more regulation? But that is something
Speaker 1: that the crypto industry wants. Nathan, Thank you so much
Speaker 1: for joining us today. It seems like there's a lot
Speaker 1: happening in Washington, d C. As it relates to crypto
Speaker 1: and regulations right now. Yeah. Actually, you know, two is
Speaker 1: the year of the crypto industry providing a lot of
Speaker 1: education and a lot of information to policymakers and regulators
Speaker 1: on what they should do in twenty three. It's a
Speaker 1: story of regulatory clarity. If you come from the SEC's perspective, well,
Speaker 1: there's a lot of clarity out there. The tokens out
Speaker 1: there at the moment are considered securities. This is SEC
Speaker 1: Chairman Gary Ginsler. Many of these tokens have the attributes
Speaker 1: of securities. They're raising money from the public, and the
Speaker 1: public is anticipating profits based upon the efforts of others.
Speaker 1: On the other side. From the industry's point of view,
Speaker 1: you will you have a new digital asset class. You know,
Speaker 1: this is something that nine three era securities law does
Speaker 1: not work for and neither side is willing to acquiesce
Speaker 1: to the other. So what happens we're in this stalemate
Speaker 1: and what the industry is doing right now is there
Speaker 1: essentially waiting for one of two things. One for the
Speaker 1: SEC to start cracking down via enforcement actions and the
Speaker 1: SEC has sort of done some of that. Or two
Speaker 1: and this is in the industry's more preferred solution is
Speaker 1: is that they move forward with congressional legislation. You know,
Speaker 1: we've seen a fury uh several key pieces of legislation
Speaker 1: coming out over the last few weeks, whether it's stable coins,
Speaker 1: a comprehensive bill that came from Senators Loomis and jillibrand
Speaker 1: most recently, you know, we have a bipartisan bill that
Speaker 1: comes from the Senate agg Committee. Uh. None of this
Speaker 1: legislation is going to pass this year, but what they
Speaker 1: are doing is they're actually sending the stage for legislation
Speaker 1: to pass in three And it sounds like, you know,
Speaker 1: in three, as you say, we're going to see a
Speaker 1: lot of all of these efforts pay off. So what's
Speaker 1: happening right now? You know, in your role on Bloomberg Intelligence,
Speaker 1: you analyze these things that are coming through one of
Speaker 1: the big things recently was the Biden White House executive
Speaker 1: Order that essentially directed various of the federal agencies to
Speaker 1: figure out their crypto strategy. What have been some of
Speaker 1: the things coming out of that. Do you expect to
Speaker 1: bear fruits in that timeline? Okay? So you know, going
Speaker 1: back to the earlier part of this year in March,
Speaker 1: President Biden put on an executive order. In that executive
Speaker 1: order essentially directed agencies under his directions. So this is
Speaker 1: like Treasury, Homeland Security, and so forth like that to
Speaker 1: go forth and come back with reports uh and recommendations
Speaker 1: and what they should do moving forward. Those reports and
Speaker 1: recommendations should be out between now and let's say the
Speaker 1: end of October. So that's one thing that's been happening. Now.
Speaker 1: The second thing that's been happening is the sec and
Speaker 1: the CFTC and even a little bit to the Consumer
Speaker 1: Financial Protection Bureau in the FED have been doing a
Speaker 1: lot of their own analysis on the crypto industry and
Speaker 1: looking at risks. Now, this is where it differs a
Speaker 1: little bit. You know, the Securities and Exchange Commission, they
Speaker 1: view anything out there, the tokens out there is securities
Speaker 1: for purposes Essentially Bitcoin and to a certain extent, Ether
Speaker 1: are considered commodities. Now that's something that the legislation will address,
Speaker 1: and I'll get there in a second, but for right now,
Speaker 1: the tokens in the SEC's mind, our securities. Now, the
Speaker 1: CFTC doesn't really have much authority over crypto at the
Speaker 1: moment other than you know, bitcoin futures, anything you know
Speaker 1: that's over at the CME or at the Intercontinental Exchange.
Speaker 1: But then you have the Federal Reserve looking at stable coins,
Speaker 1: and so there's all these different pieces of the puzzle
Speaker 1: that's been going on, and the industry just doesn't know
Speaker 1: how to react to it. It's actually very frustrating, I
Speaker 1: think for the industry to be able to prepare, how
Speaker 1: do I actually go forth and grow my company and
Speaker 1: grow as an industry when I don't know what the
Speaker 1: rules are. I don't know if the SEC is gonna
Speaker 1: come down and give me an enforcement action next year. Now,
Speaker 1: what this legislation most likely will do is it will
Speaker 1: actually give regulatory clarity to the crypto industry. And now
Speaker 1: the Senate Agricultural Committee has released a bipartisan bill that
Speaker 1: would essentially this is called the Digital Commodities Consumer Protection
Speaker 1: Act of two. But this bill would actually give CFTC
Speaker 1: the Commodity Futures Training Commission authority over cash markets, good
Speaker 1: spot markets. It would so give them authority over what
Speaker 1: is deemed to be digital commodities. This would be a
Speaker 1: new asset class. Now, the securities would still remain, so
Speaker 1: the debate over whether a token is a security or
Speaker 1: a commodity that would still remain. But what the industry
Speaker 1: is most looking for and what the industry is most
Speaker 1: likely going to get, and this is coin based FTX binance.
Speaker 1: Whoever registers as a crypto exchange, is you know, regulatory
Speaker 1: certainty in terms of avoiding enforcement actions. I want to
Speaker 1: ask you something there before we get into the enforcement actions,
Speaker 1: which is is there in your observation you know kind
Speaker 1: of what you're hearing. Is there a preference for who
Speaker 1: people want to be regulated by? And is that related
Speaker 1: to the potential severity of those enforcements actions? Absolutely, very
Speaker 1: few times in my career have I ever heard then
Speaker 1: an industry wants more regulation. But that is something that
Speaker 1: the crypto industry wants, uh and they want to be
Speaker 1: regulated by the Commodity Futures Training Commission the reason being
Speaker 1: is the CFTC has what is known as prince sipples
Speaker 1: based regulation over at the SEC. It's prescriptive base. So
Speaker 1: if I'm at the Commodity Futureist Training Commission and I'm
Speaker 1: f t X or coin base, I can create my
Speaker 1: own rule book, I can create my own rules, I
Speaker 1: can create my own governance procedures, and as long as
Speaker 1: they meet the principle of the regulation, the CFTC says,
Speaker 1: you're good. If you're over on the SEC side, well
Speaker 1: then it gets a little bit more in depth than
Speaker 1: in granulear and in the weeds, and each group would
Speaker 1: have to create their own system and have to make
Speaker 1: sure that all the eyes are dotted and all the
Speaker 1: tas are cross and so forth. So, you know, the
Speaker 1: the industry certainly wants to go to the CFTC, and
Speaker 1: that education and that information that they've been providing to
Speaker 1: lawmakers in two is paying off, because you're seeing this
Speaker 1: both from Democrats and Republicans in the sense that they
Speaker 1: to the Democrats and Republicans are also starting to lean
Speaker 1: towards having the CFTC be the main crypto regulative. Correct
Speaker 1: crypto is funny because it's not really a bipartisan issue.
Speaker 1: It's more of a generational issue. And what that means
Speaker 1: is that you have Democrats who are very much okay
Speaker 1: with the idea of the crypto industry going to the CFTC,
Speaker 1: you have Republicans are okay with it, and then you
Speaker 1: have Democrats and Republicans who are against that. Now, the
Speaker 1: big issue for you know, let's just say, giving the
Speaker 1: CFTC oversight over the crypto industry is that, you know,
Speaker 1: it allows the crypto firms to essentially go to a
Speaker 1: new regulatory framework and avoid threats of enforcement actions because
Speaker 1: SEC Chairman Gary Gensler has said consistently that you know,
Speaker 1: current regulation applies. You know, we don't need new rules,
Speaker 1: we don't need new legislation. All firms need to do
Speaker 1: is come in register, to come in and talk to us.
Speaker 1: Coming to register, You're going to do what we can.
Speaker 1: But right now there's far too many of these platforms
Speaker 1: that haven't come in uh to basically comply with the
Speaker 1: law and register. He says this almost every interview. He said,
Speaker 1: as but nobody has really done that. And the reason
Speaker 1: being is, and I have a I have a Star
Speaker 1: Wars joke here, is that it's like you know, the
Speaker 1: Return of the Jedi. It's this Admiral Lackbar that with
Speaker 1: Creature who leads the rebelry. Yeah, he streams it's a trap. Well,
Speaker 1: if you go talk to the SEC, it could be
Speaker 1: a trap because the SEC would then take a look
Speaker 1: and say, Okay, this is great, thank you very much
Speaker 1: for coming in and talk to ing to us. But
Speaker 1: for the last two years you've been operating outside of
Speaker 1: securities law and therefore you need to you know, pay
Speaker 1: for that. So if this legislation passes next year, not
Speaker 1: only does the industry get clarity, but they almost get
Speaker 1: like I don't want to call it get out of
Speaker 1: jail free card, but they get you know, they get
Speaker 1: away from that threat of the SEC enforcement, which is
Speaker 1: of course what the industry would have everyone believe right
Speaker 1: that the main thing here is clarity as opposed to
Speaker 1: being subject to what they perceive as more onerous rules
Speaker 1: and regulations. Yeah. I mean, if you look at the
Speaker 1: nineteen thirty three Securities Act, I mean it's only about
Speaker 1: forty pages. I mean it's it's very light and so uh,
Speaker 1: it's very broad, and you know, the SEC has taken
Speaker 1: the approach that these firms just need to come in
Speaker 1: and register. And if you go in and register, then
Speaker 1: and start from the beginning. Let's just say there is
Speaker 1: a new company and you want to follow the SEC
Speaker 1: standard and you're going to register. Well, then you go
Speaker 1: in and you produce all this different types of governance
Speaker 1: and these rule books and these you know, the technology
Speaker 1: requirements and clients and examinations so forth. And it costs
Speaker 1: a lot of money. Now you do that at the
Speaker 1: same time that others in the industry aren't registering with
Speaker 1: the SEC, and so now you're spending a lot more
Speaker 1: money when I the retail customer doesn't don't really care
Speaker 1: about things like governance and you know, you know, like
Speaker 1: the behind the scenes operational aspects if you will. So
Speaker 1: you know, the industry really hasn't made any decision, or
Speaker 1: the industry has really taking the point of, you know,
Speaker 1: let's not register until we have to, and instead, let's
Speaker 1: lobby Congress to try and give us a regulatory framework
Speaker 1: that we can work with, and ultimately I think that's
Speaker 1: gonna pay off. Now, the SEC has not done yet though,
Speaker 1: because like I said before, you know, I do anticipate
Speaker 1: legislation moving next year. But what type of legislation, because
Speaker 1: there was a bill that came out earlier this year
Speaker 1: from Senators Loomis and Jill Brand and this was the
Speaker 1: first comprehensive bill. And the question here is stable coins,
Speaker 1: because if you look at the lobbying that has been
Speaker 1: done to Congress this year, stable coins has become a
Speaker 1: bigger issue than just the crypto industry, a bit large.
Speaker 1: Seeing a stable coin fail is something that goes into
Speaker 1: the news cycle, and that's something a politician can understand.
Speaker 1: It's a little bit easier for them than understanding what,
Speaker 1: you know, registration requirements for the Commodity Futures Training Commission
Speaker 1: can be. And so you know certain folks on on
Speaker 1: up on Capitol Hill taking the approach of well, let's
Speaker 1: do stable coins first and then let's do the rest later.
Speaker 1: And in fact, the House Financial Services Committee, this is
Speaker 1: UH chair Chairwoman Maxine Waters and Rank member mckenry from
Speaker 1: North Carolina, they're going to have a stable coin bill
Speaker 1: that comes out in September, so you know there's gonna
Speaker 1: be momentum to try and get stable coin legislation done
Speaker 1: before the crypto exchange registration issue. And now the question is, well,
Speaker 1: what do we do and when do we do stable coins,
Speaker 1: do we do commodity in futures? Do we do spot markets?
Speaker 1: And that eats up a lot of political capital. But
Speaker 1: the order is, the question is do they move on
Speaker 1: stable coins first? You know, the House Financial Service Committee
Speaker 1: versus the Senate Agricultural Committee. I mean, who has the
Speaker 1: ability to move their legislation first? You know, do they
Speaker 1: move them at the same time, do they move the differently?
Speaker 1: So that's where it's just gonna get a little bit messy.
Speaker 1: But ultimately, with this legislation passing, probably with by a
Speaker 1: year from now. Up next, more of my conversation with
Speaker 1: Nathan Dean of Bloomberg Intelligence will discuss more of the
Speaker 1: regulatory conundrum facing federal agencies trying to balance the interests
Speaker 1: of consumers, investors, and digital asset companies. I want to
Speaker 1: go back to the conversation about stable coins because, as
Speaker 1: you said, there's lots of reasons why it's getting so
Speaker 1: much attention, but there's one I want us to call out,
Speaker 1: which is, you know, various regulators around the world have
Speaker 1: identified two things about stable coins that stressed amount. One
Speaker 1: the possibility of like the global transmission of risk. Right,
Speaker 1: because you have people in lots of different countries using
Speaker 1: these very liquid, supposedly stable assets, and you know, as
Speaker 1: you mentioned, like consumers can get burned by these and
Speaker 1: when they collapse, it's a news cycle, and that is
Speaker 1: always like politically fraught. But the second thing is some
Speaker 1: governments perceive them as competitive to their own sovereign currencies.
Speaker 1: And I'm wondering if there's anything about the current focus
Speaker 1: on stable coins or any other elements that you're getting
Speaker 1: from this proposed regulation that has a sense of like
Speaker 1: a national security consideration. That's a great question, and in
Speaker 1: fact there's two aspects of the way that I would
Speaker 1: answer that. Um. The first is, specifically when it comes
Speaker 1: to stable coins, the legislation that's coming out from the
Speaker 1: House Financial Services Committee is more essentially just going to
Speaker 1: require both banks and non banks who issue stable coins
Speaker 1: to be backed up by high quality liquid assets. It
Speaker 1: really doesn't get into the national security argument all that much,
Speaker 1: so view that more of as a tactical bill, and
Speaker 1: that's the one that we anticipate that's going to come
Speaker 1: out next year. The more strategic national risk aspect, though,
Speaker 1: comes from the Federal Reserve in this creation of a
Speaker 1: central bank digital currency now you know the one. I
Speaker 1: don't think it was really well reported at the time.
Speaker 1: But when President Biden put out the Executive Order in March,
Speaker 1: there was a directive in that executive Order to direct
Speaker 1: the Department of Treasury to come back with a report
Speaker 1: on whether or not a central bank digital currency is
Speaker 1: advisable and if so, it directed the Attorney General to
Speaker 1: create legislative language do in that. Congress will ignore it.
Speaker 1: But that's much further step than I anticipated that the
Speaker 1: Biden administration would take. Now, if you go to the
Speaker 1: FED and you asked Jerome Powell, you you ask Governor
Speaker 1: Brainerd on whether or not the federal create a central
Speaker 1: bank digital currency. Chairman Powell has said that he would
Speaker 1: only do so if he was directed by Congress or
Speaker 1: the Executive branch. Now, Congress really tried to hammer him
Speaker 1: down and whether or not he would do it without
Speaker 1: a Congressional action. But Governor Brainard has been open to
Speaker 1: the idea of a central bank digital currency, with the
Speaker 1: caveat that it would take up to five years. And
Speaker 1: the reason why I think the vet will will eventually
Speaker 1: approve a central bank digital currency is just because of
Speaker 1: the argument that if the United States doesn't, others will.
Speaker 1: The United States needs to do one before other countries
Speaker 1: end up getting the amount of liquidity that goes to
Speaker 1: the point where the US is harmed by bat Generally,
Speaker 1: when the crypto industry comes to Washington, they say, well,
Speaker 1: if you don't do this, we're going to fall behind.
Speaker 1: The argument that the United States needs to create a
Speaker 1: central being digital currency before others create liquidity to the
Speaker 1: point where it begins to harm US interests. That is
Speaker 1: actually working a little bit over the fed with the
Speaker 1: caveat that this could take. And just on that notes
Speaker 1: about you know, things that you think folks might not
Speaker 1: be fully paying attention to, things that have been under reported.
Speaker 1: Is there any other element of either this regulation or
Speaker 1: the kind of you know, the conversations and discussions that
Speaker 1: you might be having or a privy to that you
Speaker 1: think people really need to be paying much more attention
Speaker 1: to than they potentially are right now. So I wouldn't
Speaker 1: underestimate SEC Chairman Gary Gensler. Um. You know, we've said
Speaker 1: that this legislation we think will pass next year, or
Speaker 1: some form of this legislation will pass next year. But
Speaker 1: you know the SEC chairman is taking in the approach
Speaker 1: that these tokens out there securities and as a result,
Speaker 1: the crypto exchanges that are offering these securities aren't following
Speaker 1: securities law, and therefore we are just waiting for enforcement
Speaker 1: actions to occur. You know. In fact, we've even seen
Speaker 1: statements from him over the last few weeks that just
Speaker 1: go as far as to say that maybe the sec
Speaker 1: should get into the business of writing a rulemaking on
Speaker 1: how crypto exchanges can operate. So you know, that's the
Speaker 1: question of Okay, this legislation will pass, but you know,
Speaker 1: there are several Democrats and Republicans out there who are
Speaker 1: not comfortable with this, and ultimately President Biden has to
Speaker 1: sign it. And you know, I don't think anybody really
Speaker 1: knows what President Biden's view on cryptocurrency is. But there
Speaker 1: are going to be several catalyst of moments between now
Speaker 1: and say August of next year that are going to
Speaker 1: make things a little bit more challenging from the crypto industry.
Speaker 1: But ultimately, we think, if you were to say three
Speaker 1: or five years from now, are you do you have
Speaker 1: this regulatory clarity? You do? And most of the times
Speaker 1: when we've seen a new regulation and I'm not talking
Speaker 1: about crypto here, but just whenever you see a new
Speaker 1: form of financial regulation come in that disrupts markets, it
Speaker 1: ultimately benefits the bigger players that have compliance teams and
Speaker 1: monilarity teams and so forth, to the detriment of the
Speaker 1: moment pops out there. Nathan, thank you so much. That
Speaker 1: has been such a helpful and I think insightful overview
Speaker 1: of what folks can or should be expecting as it
Speaker 1: relates to us crypto regulation. Really appreciate you taking the
Speaker 1: time to come in the podcast today. No, thank you
Speaker 1: very much for having me. It was an absolute joy.
Speaker 1: You can find more of Nathan Dean's analysis on the
Speaker 1: Bloomberg Terminal or follow him on Twitter at Nathan Dean
Speaker 1: d C. On the next Bloomberg Crypto. London is one
Speaker 1: of the world's top destination for banks and financial services firms,
Speaker 1: but it's had a harder time attracting and keeping crypto
Speaker 1: companies because of regulatory uncertainty around the status of digital assets. Tomorrow,
Speaker 1: my colleague Emily Nicole will tackle how the Law Commission
Speaker 1: of England and Whales is working to rebuild that reputation
Speaker 1: for regulatory innovation. This is Bloomberg Crypto a daily podcast
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Speaker 1: producer of Bloomberg Crypto is Vicky ver Galina. Our senior
Speaker 1: producer is Janet Babin. Our producer is Sharon Barriro. Associate
Speaker 1: producer is Ty Butler. Desta wonder At is our engineer.
Speaker 1: Original music by Leo Sidrin. I'm Stacy Marie SMaL. We'll
Speaker 1: be back tomorrow