Biden's Approach to Crypto

way through the US political machine right now. Representative Maxine Waters, who's the chair of the powerful House Financial Services Committee, and ranking Member Patrick McHenry want to regulate stable coins.

Senators Cynthia Lamas and Kristin gila Brand have proposed several significant changes to the crypto regulation regime in a build that they're calling the Responsible Financial in a Asian Act, And earlier this year, President Joe Biden himself issued his Executive Order on Ensuring Responsible Development as Digital Assets, which basically mandated every relevant federal agency to figure out or at least define their position on crypto and of course,

to identify ways to protect consumer rights as well as the rights of investors. Joining me today for a discussion of these many complicated pieces of potential crypto legislation in the US is Nathan Dean, a senior analyst at Bloomberg Intelligence. Very few times in my career if I ever heard did an industry wants more regulation? But that is something that the crypto industry wants. Nathan, Thank you so much

for joining us today. It seems like there's a lot happening in Washington, d C. As it relates to crypto and regulations right now. Yeah. Actually, you know, two is the year of the crypto industry providing a lot of education and a lot of information to policymakers and regulators on what they should do in twenty three. It's a story of regulatory clarity. If you come from the SEC's perspective, well, there's a lot of clarity out there. The tokens out

there at the moment are considered securities. This is SEC Chairman Gary Ginsler. Many of these tokens have the attributes of securities. They're raising money from the public, and the public is anticipating profits based upon the efforts of others. On the other side. From the industry's point of view, you will you have a new digital asset class. You know, this is something that nine three era securities law does not work for and neither side is willing to acquiesce

to the other. So what happens we're in this stalemate and what the industry is doing right now is there essentially waiting for one of two things. One for the SEC to start cracking down via enforcement actions and the SEC has sort of done some of that. Or two and this is in the industry's more preferred solution is

is that they move forward with congressional legislation. You know, we've seen a fury uh several key pieces of legislation coming out over the last few weeks, whether it's stable coins, a comprehensive bill that came from Senators Loomis and jillibrand most recently, you know, we have a bipartisan bill that

comes from the Senate agg Committee. Uh. None of this legislation is going to pass this year, but what they are doing is they're actually sending the stage for legislation to pass in three And it sounds like, you know, in three, as you say, we're going to see a lot of all of these efforts pay off. So what's

happening right now? You know, in your role on Bloomberg Intelligence, you analyze these things that are coming through one of the big things recently was the Biden White House executive Order that essentially directed various of the federal agencies to figure out their crypto strategy. What have been some of the things coming out of that. Do you expect to bear fruits in that timeline? Okay? So you know, going back to the earlier part of this year in March,

President Biden put on an executive order. In that executive order essentially directed agencies under his directions. So this is like Treasury, Homeland Security, and so forth like that to go forth and come back with reports uh and recommendations and what they should do moving forward. Those reports and recommendations should be out between now and let's say the end of October. So that's one thing that's been happening. Now.

The second thing that's been happening is the sec and the CFTC and even a little bit to the Consumer Financial Protection Bureau in the FED have been doing a lot of their own analysis on the crypto industry and looking at risks. Now, this is where it differs a little bit. You know, the Securities and Exchange Commission, they view anything out there, the tokens out there is securities for purposes Essentially Bitcoin and to a certain extent, Ether

are considered commodities. Now that's something that the legislation will address, and I'll get there in a second, but for right now, the tokens in the SEC's mind, our securities. Now, the CFTC doesn't really have much authority over crypto at the moment other than you know, bitcoin futures, anything you know that's over at the CME or at the Intercontinental Exchange.

But then you have the Federal Reserve looking at stable coins, and so there's all these different pieces of the puzzle that's been going on, and the industry just doesn't know how to react to it. It's actually very frustrating, I think for the industry to be able to prepare, how do I actually go forth and grow my company and grow as an industry when I don't know what the rules are. I don't know if the SEC is gonna

come down and give me an enforcement action next year. Now, what this legislation most likely will do is it will actually give regulatory clarity to the crypto industry. And now the Senate Agricultural Committee has released a bipartisan bill that would essentially this is called the Digital Commodities Consumer Protection Act of two. But this bill would actually give CFTC the Commodity Futures Training Commission authority over cash markets, good

spot markets. It would so give them authority over what is deemed to be digital commodities. This would be a new asset class. Now, the securities would still remain, so the debate over whether a token is a security or a commodity that would still remain. But what the industry is most looking for and what the industry is most likely going to get, and this is coin based FTX binance. Whoever registers as a crypto exchange, is you know, regulatory

certainty in terms of avoiding enforcement actions. I want to ask you something there before we get into the enforcement actions, which is is there in your observation you know kind of what you're hearing. Is there a preference for who people want to be regulated by? And is that related to the potential severity of those enforcements actions? Absolutely, very few times in my career have I ever heard then

an industry wants more regulation. But that is something that the crypto industry wants, uh and they want to be regulated by the Commodity Futures Training Commission the reason being is the CFTC has what is known as prince sipples

based regulation over at the SEC. It's prescriptive base. So if I'm at the Commodity Futureist Training Commission and I'm f t X or coin base, I can create my own rule book, I can create my own rules, I can create my own governance procedures, and as long as they meet the principle of the regulation, the CFTC says,

you're good. If you're over on the SEC side, well then it gets a little bit more in depth than in granulear and in the weeds, and each group would have to create their own system and have to make sure that all the eyes are dotted and all the

tas are cross and so forth. So, you know, the the industry certainly wants to go to the CFTC, and that education and that information that they've been providing to lawmakers in two is paying off, because you're seeing this both from Democrats and Republicans in the sense that they to the Democrats and Republicans are also starting to lean towards having the CFTC be the main crypto regulative. Correct crypto is funny because it's not really a bipartisan issue.

It's more of a generational issue. And what that means is that you have Democrats who are very much okay with the idea of the crypto industry going to the CFTC, you have Republicans are okay with it, and then you

have Democrats and Republicans who are against that. Now, the big issue for you know, let's just say, giving the CFTC oversight over the crypto industry is that, you know, it allows the crypto firms to essentially go to a new regulatory framework and avoid threats of enforcement actions because SEC Chairman Gary Gensler has said consistently that you know, current regulation applies. You know, we don't need new rules,

we don't need new legislation. All firms need to do is come in register, to come in and talk to us. Coming to register, You're going to do what we can. But right now there's far too many of these platforms that haven't come in uh to basically comply with the law and register. He says this almost every interview. He said, as but nobody has really done that. And the reason being is, and I have a I have a Star Wars joke here, is that it's like you know, the

Return of the Jedi. It's this Admiral Lackbar that with Creature who leads the rebelry. Yeah, he streams it's a trap. Well, if you go talk to the SEC, it could be a trap because the SEC would then take a look and say, Okay, this is great, thank you very much for coming in and talk to ing to us. But for the last two years you've been operating outside of securities law and therefore you need to you know, pay

for that. So if this legislation passes next year, not only does the industry get clarity, but they almost get like I don't want to call it get out of jail free card, but they get you know, they get away from that threat of the SEC enforcement, which is of course what the industry would have everyone believe right that the main thing here is clarity as opposed to being subject to what they perceive as more onerous rules

and regulations. Yeah. I mean, if you look at the nineteen thirty three Securities Act, I mean it's only about forty pages. I mean it's it's very light and so uh, it's very broad, and you know, the SEC has taken the approach that these firms just need to come in and register. And if you go in and register, then and start from the beginning. Let's just say there is a new company and you want to follow the SEC

standard and you're going to register. Well, then you go in and you produce all this different types of governance and these rule books and these you know, the technology requirements and clients and examinations so forth. And it costs a lot of money. Now you do that at the same time that others in the industry aren't registering with the SEC, and so now you're spending a lot more money when I the retail customer doesn't don't really care about things like governance and you know, you know, like

the behind the scenes operational aspects if you will. So you know, the industry really hasn't made any decision, or the industry has really taking the point of, you know, let's not register until we have to, and instead, let's lobby Congress to try and give us a regulatory framework that we can work with, and ultimately I think that's gonna pay off. Now, the SEC has not done yet though, because like I said before, you know, I do anticipate

legislation moving next year. But what type of legislation, because there was a bill that came out earlier this year from Senators Loomis and Jill Brand and this was the first comprehensive bill. And the question here is stable coins, because if you look at the lobbying that has been done to Congress this year, stable coins has become a bigger issue than just the crypto industry, a bit large.

Seeing a stable coin fail is something that goes into the news cycle, and that's something a politician can understand. It's a little bit easier for them than understanding what, you know, registration requirements for the Commodity Futures Training Commission can be. And so you know certain folks on on up on Capitol Hill taking the approach of well, let's do stable coins first and then let's do the rest later.

And in fact, the House Financial Services Committee, this is UH chair Chairwoman Maxine Waters and Rank member mckenry from North Carolina, they're going to have a stable coin bill that comes out in September, so you know there's gonna be momentum to try and get stable coin legislation done before the crypto exchange registration issue. And now the question is, well, what do we do and when do we do stable coins, do we do commodity in futures? Do we do spot markets?

And that eats up a lot of political capital. But the order is, the question is do they move on stable coins first? You know, the House Financial Service Committee versus the Senate Agricultural Committee. I mean, who has the ability to move their legislation first? You know, do they move them at the same time, do they move the differently? So that's where it's just gonna get a little bit messy. But ultimately, with this legislation passing, probably with by a

year from now. Up next, more of my conversation with Nathan Dean of Bloomberg Intelligence will discuss more of the regulatory conundrum facing federal agencies trying to balance the interests of consumers, investors, and digital asset companies. I want to go back to the conversation about stable coins because, as you said, there's lots of reasons why it's getting so much attention, but there's one I want us to call out, which is, you know, various regulators around the world have

identified two things about stable coins that stressed amount. One the possibility of like the global transmission of risk. Right, because you have people in lots of different countries using these very liquid, supposedly stable assets, and you know, as you mentioned, like consumers can get burned by these and when they collapse, it's a news cycle, and that is always like politically fraught. But the second thing is some governments perceive them as competitive to their own sovereign currencies.

And I'm wondering if there's anything about the current focus on stable coins or any other elements that you're getting from this proposed regulation that has a sense of like a national security consideration. That's a great question, and in fact there's two aspects of the way that I would

answer that. Um. The first is, specifically when it comes to stable coins, the legislation that's coming out from the House Financial Services Committee is more essentially just going to require both banks and non banks who issue stable coins to be backed up by high quality liquid assets. It really doesn't get into the national security argument all that much, so view that more of as a tactical bill, and that's the one that we anticipate that's going to come

out next year. The more strategic national risk aspect, though, comes from the Federal Reserve in this creation of a central bank digital currency now you know the one. I don't think it was really well reported at the time.

But when President Biden put out the Executive Order in March, there was a directive in that executive Order to direct the Department of Treasury to come back with a report on whether or not a central bank digital currency is advisable and if so, it directed the Attorney General to create legislative language do in that. Congress will ignore it. But that's much further step than I anticipated that the

Biden administration would take. Now, if you go to the FED and you asked Jerome Powell, you you ask Governor Brainerd on whether or not the federal create a central bank digital currency. Chairman Powell has said that he would only do so if he was directed by Congress or the Executive branch. Now, Congress really tried to hammer him down and whether or not he would do it without a Congressional action. But Governor Brainard has been open to the idea of a central bank digital currency, with the

caveat that it would take up to five years. And the reason why I think the vet will will eventually approve a central bank digital currency is just because of the argument that if the United States doesn't, others will. The United States needs to do one before other countries end up getting the amount of liquidity that goes to the point where the US is harmed by bat Generally, when the crypto industry comes to Washington, they say, well, if you don't do this, we're going to fall behind.

The argument that the United States needs to create a central being digital currency before others create liquidity to the point where it begins to harm US interests. That is actually working a little bit over the fed with the caveat that this could take. And just on that notes about you know, things that you think folks might not be fully paying attention to, things that have been under reported.

Is there any other element of either this regulation or the kind of you know, the conversations and discussions that you might be having or a privy to that you think people really need to be paying much more attention to than they potentially are right now. So I wouldn't underestimate SEC Chairman Gary Gensler. Um. You know, we've said that this legislation we think will pass next year, or

some form of this legislation will pass next year. But you know the SEC chairman is taking in the approach that these tokens out there securities and as a result, the crypto exchanges that are offering these securities aren't following securities law, and therefore we are just waiting for enforcement

actions to occur. You know. In fact, we've even seen statements from him over the last few weeks that just go as far as to say that maybe the sec should get into the business of writing a rulemaking on how crypto exchanges can operate. So you know, that's the question of Okay, this legislation will pass, but you know, there are several Democrats and Republicans out there who are not comfortable with this, and ultimately President Biden has to sign it. And you know, I don't think anybody really

knows what President Biden's view on cryptocurrency is. But there are going to be several catalyst of moments between now and say August of next year that are going to make things a little bit more challenging from the crypto industry. But ultimately, we think, if you were to say three or five years from now, are you do you have

this regulatory clarity? You do? And most of the times when we've seen a new regulation and I'm not talking about crypto here, but just whenever you see a new form of financial regulation come in that disrupts markets, it ultimately benefits the bigger players that have compliance teams and monilarity teams and so forth, to the detriment of the

moment pops out there. Nathan, thank you so much. That has been such a helpful and I think insightful overview of what folks can or should be expecting as it relates to us crypto regulation. Really appreciate you taking the time to come in the podcast today. No, thank you very much for having me. It was an absolute joy. You can find more of Nathan Dean's analysis on the Bloomberg Terminal or follow him on Twitter at Nathan Dean

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