Speaker 1: This is Bloomberg Crypto and Daily Bloomberg I HUD Podcast,
Speaker 1: and I'm Mike Reagan ins today for Stacy Marie Ishmol.
Speaker 1: It's Tuesday, January one. The bankruptcy of crypto Exchange ft
Speaker 1: X and the arrest of its former CEO, Sam Bakman
Speaker 1: Freed have obviously had a lasting effect on the digital
Speaker 1: assets sector, but it's also made an indelible impact on
Speaker 1: the politicians and policymakers who are supposed to regulate the industry.
Speaker 1: There already was a fire lit under some lawmakers when
Speaker 1: it comes to imposing regulations on crypto. Last year, President
Speaker 1: Biden issued an executive order asking agencies to take coordinated
Speaker 1: action on digital assets, and in the summer, Senators Cynthia
Speaker 1: Lummis and Kristen Gillibrand issued a bipartisan crypto bill that,
Speaker 1: among other things, would step up oversight on stable coins
Speaker 1: and crypto energy usage. And then there is the ongoing
Speaker 1: debate between the Securities and Exchange Commission and the Commodities
Speaker 1: Futures Trading Commission over whether cryptocurrencies should be regulated as
Speaker 1: securities were commodities. But with an ongoing wave of crypto
Speaker 1: bankruptcies linked to fd X, government officials are confronted with
Speaker 1: a new sense of urgency surrounding digital asset regulation. Here
Speaker 1: to talk about this are Bloomberg reporters Ali Verspiel and
Speaker 1: Lydia Bayoud Ali, Lydia welcome. So Ali, uh, now that
Speaker 1: one of the largest crypto exchanges has collapsed? Has that
Speaker 1: changed the debate on regulation? What's changed in the conversations
Speaker 1: among regulators after FDx? You know, so, I'll say that
Speaker 1: there's definitely a lot more urgency and the conversations that
Speaker 1: we're hearing both at regulator d's groups like the Financial
Speaker 1: Stability Oversight Council, which is led by Treasury, um at
Speaker 1: you know, the lawmaker level, you're definitely seeing a lot
Speaker 1: more skepticism and you know, talks about trying to, you know,
Speaker 1: maybe put some new rules in place. UM. For instance,
Speaker 1: Senator Shared Brown, who's the chairman of the Senate Banking Committee,
Speaker 1: you know, he recently sent a letter to Treasury Secretary
Speaker 1: Janet Yellen saying, you know, we'd like to work with
Speaker 1: the agencies to put out crypto oversight framework of some sort.
Speaker 1: You know, so you're definitely seeing those conversations happen. UM.
Speaker 1: You know, to some extent, we were seeing a little
Speaker 1: bit of the conversation into last year. You know, there
Speaker 1: was some turmoil before FTX, and obviously f t X
Speaker 1: was a huge event though, and so you know, there
Speaker 1: have been talks ongoing about regulating stable coins and potentially
Speaker 1: you know, offering broader rules as well. I think now
Speaker 1: we're going to see a lot of focus on things
Speaker 1: like fraud, things like protecting customer assets. Um so it'll
Speaker 1: be interesting to see how that plays outgoing forward, and
Speaker 1: just out on the CFTC side, there's also been i
Speaker 1: think more interest using again f t X as this
Speaker 1: kind of Markie example of what can go wrong. The
Speaker 1: CFTC is also interested interested as you know, Congress is
Speaker 1: considering ways to change UH and bring more more direct
Speaker 1: regulation of these exchanges into being. You know, they have testified,
Speaker 1: the chairs testified and other commissioners there have testified that
Speaker 1: they're really limited in their ability to kind of like
Speaker 1: look through, you know, if there's a U S entity
Speaker 1: like FTX actually had a drivers exchange that was regulated
Speaker 1: here with it by the CFTC, but they weren't able
Speaker 1: to look through to the international exchange and kind of
Speaker 1: see that there's this constellation of subsidiaries and sister companies,
Speaker 1: and they they're not able to kind of find out
Speaker 1: all the corporate governance stuff, you know, barring having a
Speaker 1: whistleblower tip or some reason to bring any sort of
Speaker 1: investigation or enforcement action. And you know, they've flagged that
Speaker 1: that's potentially an issue for this very specific market. And uh,
Speaker 1: there were some recent speeches where commisions have asked Congress to,
Speaker 1: you know, consider that fact as they're trying to perhaps
Speaker 1: address some of the lessons learned from f t x
Speaker 1: s and other companies collapse this past year, Lydia, how
Speaker 1: about from the CFTC, and is there any new sense
Speaker 1: of urgency, any new priorities do you think? Yeah? So,
Speaker 1: I think what was notable in the sort of immediate
Speaker 1: fallout of f t x is bankruptcy is that the
Speaker 1: chair of the CFTC had to come before the Senate
Speaker 1: Ad Committee, which is a committee where he had actually
Speaker 1: been a senior staffer at one point, and testify about
Speaker 1: their oversight of kind of a smaller player within the
Speaker 1: f t X universe that had been seeking to do
Speaker 1: an interesting derivatives trading operation with with cryptocurrency and had
Speaker 1: that had never progressed, but also f t X was
Speaker 1: kind of in many ways seen as aligned with the
Speaker 1: CFTC and was helping push legislation that would have given
Speaker 1: it a lot more authority in a way that other
Speaker 1: players in the crypto community thought might also be beneficial
Speaker 1: to them. Said that happened, and it was kind of
Speaker 1: noticeable that the SEC didn't have so much scrutiny from
Speaker 1: the Hill and in terms of getting kind of hauled
Speaker 1: up there to to testify. So since then, I think
Speaker 1: that the CFTC has been very keen to make the
Speaker 1: case that, you know, we can be a strong regulator
Speaker 1: in the space and sort of trying to dismantle this
Speaker 1: perception that they were really closely aligned with Sambing and
Speaker 1: Freed and f t X, And it's also given more
Speaker 1: immunition to the SEC to say, like, hey, we should
Speaker 1: we should be a strong regulator in this space. You know.
Speaker 1: It's interesting to me because in the early years of crypto,
Speaker 1: it seemed almost like the SEC and the CFTC, at
Speaker 1: least the appearance was neither one of them wanted to
Speaker 1: go near it. They didn't think it was their problem.
Speaker 1: But now they're both on the case that you get
Speaker 1: the impression Lydia that going forward they will continue to
Speaker 1: sort of double team the space, that there won't be
Speaker 1: you know, one more aggressive than the other. Well. Ali
Speaker 1: touched on the letter, the letter from Senator around to
Speaker 1: the Treasury Department asking for a hole of government approach
Speaker 1: to regulate the space. And so I think that the
Speaker 1: regulators at least publicly are coalescing behind that notion that like,
Speaker 1: we can all play a role here. But I think
Speaker 1: that the SEC ultimately because they're trying to claim so
Speaker 1: much jurisdiction, and I think with ft X really falling apart,
Speaker 1: there are some jurisdictional issues on the Hill where some
Speaker 1: of the banking committees want to be sure that they
Speaker 1: have kind of direct oversight of the regulator that itself
Speaker 1: would have oversight of the community. And so there's still
Speaker 1: some jurisdictional battles to play out. And you know, it's
Speaker 1: not just ft X these days. We've obviously had this
Speaker 1: fallout with these crypto high savings program offered by Gemini.
Speaker 1: In turn, Gemini turned over customer assets to Genesis to
Speaker 1: invest Ali has that created a new focus at all
Speaker 1: for regulators? Do you think these sort of high yield
Speaker 1: savings and loan programs that go on in crypto. Is
Speaker 1: is that a priority now? Do you believe? So? You
Speaker 1: know what's interesting is that's actually been a priority for
Speaker 1: probably at least a year now. Um. You know, we
Speaker 1: had a Bloomberg story actually last January that talked about
Speaker 1: you know, some of these what you call crypto lenders
Speaker 1: being under scrutiny at the SEC, and so it's been
Speaker 1: sort of a long time priority. You know, you're now
Speaker 1: seeing a lot of those cases come out. You mentioned
Speaker 1: Gemini Genesis. We also recently had an enforcement action against
Speaker 1: Nexo block By. There was an enforcement action earlier last year,
Speaker 1: and so it's definitely a focus. I think one of
Speaker 1: the criticisms you see now from a lot of folks is,
Speaker 1: you know, why did it take so long for these
Speaker 1: you know, enforcement actions to come um, and why did
Speaker 1: it take potentially hundreds of millions of dollars two billions
Speaker 1: of dollars of investor losses before we saw any action?
Speaker 1: And so I think that's going to be kind of
Speaker 1: an interesting thread to watch going forward. Um. You know,
Speaker 1: I am expecting the SEC to bring more cases this year.
Speaker 1: You know, all the indications that I think both Lydia
Speaker 1: and I are getting or that it's going to be
Speaker 1: a pretty active year on enforcement, So you know, we'll
Speaker 1: have to see how that plays out. But yes, I
Speaker 1: think that definitely has been a priority. But it also
Speaker 1: brings up the question. You know, some of these outfits
Speaker 1: are taking deposits, paying out interest on them, and making loans.
Speaker 1: They sound an awful lot like crypto banks. Is there
Speaker 1: a role for banking regulators here too, or are they
Speaker 1: getting in on the action here among regulators? You know,
Speaker 1: it's interesting because I I had talked to people, uh
Speaker 1: kind of making that same point. You know, why why
Speaker 1: isn't this more of a banking product? And it seems like,
Speaker 1: you know, the SEC has really sort of staked its
Speaker 1: claim saying these are actually securities products. I'm not getting,
Speaker 1: you know, any real sense that the banking regulators are
Speaker 1: are necessarily interested in that particular offering. So I think
Speaker 1: we'll continue to see the SEC sort of coming down
Speaker 1: on those. But I will say, I mean, there's not
Speaker 1: really there aren't really many left at this point. Block
Speaker 1: fives and bankruptcy Voyager Celsius. You know, they were victim
Speaker 1: to the crypto turmoil last year. Uh, nexto has has
Speaker 1: said it's not you know, it's exiting. It's us business.
Speaker 1: The coin base at one point wanted to offer these
Speaker 1: kinds of products and you know, the SEC basically told
Speaker 1: them not to and so you know, they never really
Speaker 1: got into that business. So it's uh not, but there's
Speaker 1: there's not there's not much left and I would be
Speaker 1: sort of surprised to see companies starting to get back
Speaker 1: into that as kind of like a new product that
Speaker 1: they want to offer. Yeah, and moving it back from
Speaker 1: crypto lending to just talk about the industry more broadly.
Speaker 1: I think the banking regulators have almost I don't want
Speaker 1: to say, patting themselves on the back, but they've been
Speaker 1: quite pleased. I guess that they haven't discovered, at least
Speaker 1: so far, they haven't discovered really much exposure in the
Speaker 1: main banking system, the traditional banking system to crypto and
Speaker 1: that's kind of been walled off Ali and several other colleagues.
Speaker 1: So it has a really interesting story out recently though, Um,
Speaker 1: if you want to talk about the federal home loan yeah,
Speaker 1: so that you know, this was something that's recently come
Speaker 1: to sort of the spotlight where the federal homelan banks
Speaker 1: which were originally set up to boost sort of mortgage
Speaker 1: lending under President Herbert Hoover. Purpose has sort of shifted
Speaker 1: over the years and now essentially, if you are a
Speaker 1: bank that has the appropriate type of collateral um which
Speaker 1: includes mortgage backed securities, government backed securities, things that you
Speaker 1: can buy in the market, then you're able to put
Speaker 1: that up as collateral and essentially you can get one
Speaker 1: of these loans. And so there were a lot of
Speaker 1: banks that were associated with crypto kind of seen as
Speaker 1: crypto friendly, uh silver Gate for instance, Signature Bank, and
Speaker 1: you know, what recently came came to the flour was
Speaker 1: that they were receiving loans from these federal homelan banks
Speaker 1: and it's raised a lot of new questions about, you know,
Speaker 1: what is really the role of these types of loans.
Speaker 1: Should there be you know, more restrictions in place. Is
Speaker 1: this diverging too much for sort of the initial purpose
Speaker 1: And so that's definitely been and you know, one of
Speaker 1: the things that's come up and kind of shown that
Speaker 1: crypto has seemed a little bit more into the banking
Speaker 1: sector than you know, maybe we originally thought up. Next
Speaker 1: more with Bloomberg reputters Ali Verspiel and Lydia Bayud on
Speaker 1: how the f t X collapse shifted the debate on regulation.
Speaker 1: We'll be right back. One thing I find very interesting
Speaker 1: about this whole topic is that prior to the collapse
Speaker 1: of f t X, UH Sam Bankman Freed himself was
Speaker 1: sort of this very influential character in Washington when it
Speaker 1: came to ideas for crypto regulation. He testified before Congress
Speaker 1: for hours explaining what he thought needed to be regulated.
Speaker 1: And how Lydia, are they just ignoring all that advice
Speaker 1: that that uh SPF is awaiting trial, I mean, or
Speaker 1: were there good ideas there? Do you think that that actually,
Speaker 1: despite what happened, maybe he was right about SPF definitely
Speaker 1: had an influence, but he was just one voice among many.
Speaker 1: And it's interesting because they work, they put themselves out
Speaker 1: there as you know, we're going to do crypto the
Speaker 1: right way, we embrace regulation. It was interesting to see
Speaker 1: some of his remarks UH in the immediate aftermath of
Speaker 1: bankruptcy where he was casting some down on his rosy
Speaker 1: view of regulation. But folks at the CFTC and on
Speaker 1: the Hill have testified, and also I think the SEC,
Speaker 1: but certainly at the CFTC like he was all over
Speaker 1: that agency and they really tried to bend Congress in
Speaker 1: the Hill to sort of their perspective of how to
Speaker 1: regulate the space. But there was also a lot of
Speaker 1: a lot of pushback on it that was also I
Speaker 1: think lawmaker's staff and the regulators were taking that into account.
Speaker 1: I think Ali could probably speak to that somewhat as
Speaker 1: well in terms of, you know, some of the exchanges
Speaker 1: that aren't centralized and what their view was and their
Speaker 1: pushback as well. As you know, there was some pretty
Speaker 1: blockbuster congressional hearings with Terry Duffy taking very negative view
Speaker 1: of what Sam wanted to do in sort of a
Speaker 1: disintermediated derivatives treading for crypto. Well, what do you think, Allie?
Speaker 1: I mean, SPF is such a sort of radioactive name
Speaker 1: right now. Any idea he had back then now considered
Speaker 1: off limits, do you think? So, you know, it's really interesting.
Speaker 1: I mean one of the legislative efforts that he was
Speaker 1: the most vocal supporter of was this bill from the
Speaker 1: Senate ad Committee leaders Debbie Stabina and John Boseman, and
Speaker 1: essentially that was the bill to give the CFTC oversight
Speaker 1: of certain types of tokens that could be considered commodities.
Speaker 1: You know, they specifically named bitcoin and ether, and so
Speaker 1: it's interesting because it's not necessarily just a SAM idea.
Speaker 1: Even the Financial Stability Oversight Council has come out with
Speaker 1: a report saying there's a lack of regulation of tokens
Speaker 1: that are security so bitcoin. It didn't specifically name the
Speaker 1: CFTC as as being the regulator, but you can kind
Speaker 1: of put two and two together because basically right now
Speaker 1: there's no federal overseer of those. It's all regulated at
Speaker 1: the state level. And so that idea, I think there
Speaker 1: is some backing that some sort of gap needs to
Speaker 1: be filled there. But I do think for any legislation
Speaker 1: that SAM was closely involved in or a big supporter of,
Speaker 1: you know, lawmakers are going to have to take a
Speaker 1: second look, make sure that it's as strong as they
Speaker 1: might want it to be, make sure there aren't any
Speaker 1: you know, holes. So I think it's definitely tainted the
Speaker 1: efforts where they stand, But I wouldn't necessarily be surprised
Speaker 1: if we saw policymakers reworking some of that and then
Speaker 1: putting it out, you know, putting it out in sort
Speaker 1: of a slightly different form. Walk us through where they
Speaker 1: do draw that line between what type of crypto is
Speaker 1: considered a security and what's considered a commodity. Yet now,
Speaker 1: I know it's not a hard and fast rule right now,
Speaker 1: but where do they seem to be drawing that distinction.
Speaker 1: Is it as simple as if coin pays a yield
Speaker 1: they considered a security. Is it more complex than that?
Speaker 1: So it's a little more complex. I mean, the distinction
Speaker 1: lies in this Supreme Court ruling, you know, the how
Speaker 1: we test if you will, and it kind of has
Speaker 1: four prongs. You know, there has to be an investment
Speaker 1: of money in a common enterprise with the expectation of
Speaker 1: profiting from the efforts of an organization's leadership. And so
Speaker 1: the SEC will say we think most digital assets fit
Speaker 1: into this this category, whereas crypto firms to often say, well,
Speaker 1: we think our tokens are you know, decentralized where there
Speaker 1: is no kind of central leadership making decisions. And you know,
Speaker 1: that's been one of the big issues at the center
Speaker 1: of the SEC's case against Ripple over its XRP token.
Speaker 1: It's not very clear. So that will be something that
Speaker 1: would be interesting to see if lawmakers decide to weigh
Speaker 1: in on it. It's that securities versus commodity definition is
Speaker 1: kind of like the toughest nut to crack for all
Speaker 1: the policymakers here to kind of move this issue forward
Speaker 1: and sort of designating who gets to regulate what. But
Speaker 1: you know, when we move to the legal venue, I think,
Speaker 1: as far as I can recall um Ali mentioned the
Speaker 1: Ripple case, but so far only bitcoin has like a
Speaker 1: court ruling behind it saying this one's a commodity. Everything
Speaker 1: else still seems kind of up in the air, at
Speaker 1: least in terms of, you know, here is a court
Speaker 1: order making a decision. What is interesting and something to
Speaker 1: watch though, is the SEC brought this case that Ali
Speaker 1: and I covered last year against a an executive at
Speaker 1: coin base who was allegedly sending insider trading tips to
Speaker 1: a friend and a family member. And in that complaint
Speaker 1: the SEC made these declarations. I think it was nine
Speaker 1: tokens that were listed on coin base they claimed that
Speaker 1: they were securities. And you can imagine that this coin
Speaker 1: base wasn't super thrilled about this designation in this court filing.
Speaker 1: And you know, if if eventually because there's also a
Speaker 1: criminal component, which is going to move first through court,
Speaker 1: but eventually if the civil part from the SEC, you know,
Speaker 1: gets decided by a judge, that could also bring certainly
Speaker 1: for those tokens, more clarity to the space. What are
Speaker 1: the leaders of the industry, like coin base, what's their
Speaker 1: perspective on all of this? You know, I think definitely
Speaker 1: the vast majority would rather be have their tokens be
Speaker 1: labeled commodities. You know, a lot will say though, like
Speaker 1: they that they wouldn't mind working with the SEC trying
Speaker 1: to register, but they would claim that, you know, the
Speaker 1: SEC is not working with them, that it's not you know,
Speaker 1: taking too too much of a hardline approach, and that
Speaker 1: they're having a tough time coming to agreement. Um, Whereas
Speaker 1: obviously the SEC will say, well, we think there's a
Speaker 1: lot of illegal activity happening in this space, and it's
Speaker 1: so it's hard to know what exactly is is the
Speaker 1: true narrative here. But I would say in terms of
Speaker 1: pushing legislation, a lot of the crypto industry was behind
Speaker 1: this bill to give the CFTC more authority, the one
Speaker 1: exception being the Decentralized Finance community, which you know, they
Speaker 1: felt that the bill was gave too much of an
Speaker 1: advantage to centralized exchanges like coin based like at the
Speaker 1: time FTX, they were in opposition to that legislation. Well,
Speaker 1: I think we'll leave it at that. I know, ladies,
Speaker 1: you're super busy and we really appreciate your time. Hopefully
Speaker 1: no news broke while we were sitting here talking. I
Speaker 1: don't want to drink. You never know in cryptot, no
Speaker 1: sleep on this speed. Ali Verspiel and Lydia Bayoud, thank
Speaker 1: you so much, Thank you. Thanks. You can find more
Speaker 1: of their reporting on the Bloomberg Terminal and Bloomberg dot com.
Speaker 1: For more, be sure to check out our twice weekly newsletter,
Speaker 1: Bloomberg Crypto. This is Bloomberg Crypto, a daily podcast from
Speaker 1: Bloomberg and I Heeart Radio. For more shows from iHeart Radio,
Speaker 1: visit the iHeart Radio app, Apple Podcasts, or wherever you
Speaker 1: get your podcasts. Send us your comments, questions or suggestions
Speaker 1: for the show to Crypto at Bloomberg dot net. The
Speaker 1: supervising producer of Bloomberg Crypto is Vicky Verglina. Our senior
Speaker 1: producer is Janet Babin. Our producers are Mohammed Faruk and
Speaker 1: Sharon Barriro Our associate producers are Ty Butler and Moses
Speaker 1: on Them. Desta wonder At is our engineer. Original music
Speaker 1: by Leo Sidron. I'm Stacy Marie Shmall. We'll be back tomorrow.