Hello, and welcome to another episode of the Odd Lots podcast. I'm Joe Wisn't Thal and I'm Tracy Alloway. Tracy, you know, one of the big There is a lot of ambiguity and confusion right now, I would say about the state of crypto regulation just a little bit, just a tiny bit, like I mean, and it's understandable why because it's I guess, a new type of asset class. They're not all the same.
It doesn't seem to quite fit into commodity buckets. Most of them don't fit quite into say equity buckets there. They call them cryptocurrencies in many cases, but they're not really currencies. So you can sort of see why the existing regulatory structure isn't quite up to the task, right. And often the technology or the things being made are changing all the time. So for instance, we used to have you know, I c o s Now we have
tokens and things like that. But I think what you're getting at is there has been this long running criticism of the way crypto regulation is being done, which is it's often just better to launch something and kind of ask for permission later, right, like, just launch it, see
what happens. But if you're a big crypto organization, you know, a crypto company with a team of lawyers, and you actually go and ask the securities regulators about what you're doing, often they just say no, outright, that's the trope, that's right. So I've talked to lawyers and this is what they say. They say, Look, if we try to be on the right side of the law, if we say go to the sec and this we want to do, then they
spend years trying to lawyers. Meanwhile, someone just launches a token without doing any of that in the rebillionaire the next day. That's going to be kind of frustrating, right, It's not a great incentive structure if that's what's happening. Right, So,
you know, there's this problem. The regulatory agencies don't seem to quite have their hands around it, and because of how politics seems to be in d C. I don't think anyone is really holding their breath for like some really clear law to get past, like say the Telecom Act in the nineties in which the Internet was coming and they passed the law about certain things like maybe that will happen, But I don't think it's like obvious that like Congress is going to come to the rescue
with a clear solution here. But also now that crypto is so big, it seems kind well, it seems inevitable that more people are going to be looking at this and discussing whether or not it needs to change. Should you have this sort of ad hoc regulatory regime or
something else? All right, Well, we are have a great guest today to talk about that, and a someone in d C who has taken a real interest in crypto who you're going to be speaking with, Senator pet too, me of Pennsylvania and one of the more active elected officials with an interest in crypto regulations. So, Senator, thank you so much for joining us. Well, thanks very much for having me. Senator. Who's to blame for this sort
of this confusion? I'm not sure you Maybe you disagree with our characterization, but who's to blame for this confused usian about crypto regulation, the lack of clarity and all of the sort of perverse incentive that that creates. Well, I think I agree with your discussion with Tracy about the inherent difficulty of trying to shoehorn these crypto tokens
from these various projects into existing law. Uh. You know, much of our securities law is based on ninety three and ninety four legislation literally and court cases that followed that often in the forties and fifties. Can you imagine being more far removed from crypto? Right? I mean, so it doesn't fit well. There are attributes of these protocols and the corresponding tokens that are completely unlike any actual security something that we all universally would agree as a security.
There are ways in which most crypto projects are fundamentally different. So, so we have this new technology that came along, and you know, I guess you could blame Congress for not moving quickly to establish the legislative guidelines that would then make it clear exactly what buckets these assets should be in, including the possibility that it's an altogether new bucket, and
what the various regulators authorities ought to be. And in the absence of Congress speaking, then you will have what we are witnessing, which is regulators kind of trying to grab authority here, whether or not they ought to. And that's no way to create an environment for a really important new technology to thrive. So that's why I'm so determined to get something done in the legislative realm so that we can provide some certainty and hopefully a rational
set of guard rails that will allow this innovation to continue. So, just on that point, if I could ask a sort of big picture question, you have taken an interest in crypto, and you've been advocating better crypto regulation, and I'm just curious, like, what is the benefit of crypto in your mind, because often when I think about crypto's relationship with the government, it's almost set up, or at least initially, it was
set up to be adversarial. Right, this was about censorship resistant money and technology things that let you send funds or do transactions without much oversight. So it seems to me like governments maybe should approach it with some caution, but clearly you see some value from the technology itself.
Can you just explain, like what your position is. Well, first of all, I do think that we have a privacy right to move value in the form of a currency or some other asset without the government watching everything we do. There's a reason why I think Congress would overwhelmingly insist that we not abolish cash, right, I mean, in China, I think they have, or they're they're close to.
As a practical matter, abolishing cash, it's very very convenient for the government to be able to monitor everyone's every transaction, to force everything into a digital space that in China the government has eyes on. So that's one I do think there's a legitimate interest in privacy. There's more practical matters because I think a lot of people there'st think of the volume of transactions that go on credit cards, and obviously that information is not uniquely held by the consumer,
it's held by financial institutions. But I think the ease of transactions, the ability to move money on a peer to peer basis and leave out intermediaries that inevitably charge a fee for the execution. In particular, that fee extremely expensive when you move money internationally. I also think that there's going to be very exciting innovations that we probably
can't imagine yet. You know, when when the Internet was first being developed, I don't think too many people envisioned Amazon and Uber and Netflix and you know, the things that have totally transformed consumption and not not just consumption of information, but even consumption of goods and services. Well, I think that could happen here as well. I think
programmable money, for instance, is a very exciting technology. The ability to have embedded in a unit of value, a form of money, a transaction, a movement of that value based on some exogenous but verifiable event. That's really interesting. And I could imagine lots of applications validating ownership, um, you know, in an immutable way. That's something that blockchain allows.
So so I think there's all kinds of application that are likely to emerge, and we should not presume that that can't happen or and we certainly shouldn't do anything to preclude it. So you've been very critical of SEC Chief Gensler, you know, and there's a lot of reasons I think people are critical. There's been there are a number of like you know, Central Seed, Sei Fi things that went bust. People weren't protected them, like people think
about stuff like Celsius. And then, as you pointed out, this idea of sort of like regulation by enforcement, where no one knows the rules and then suddenly there's a lawsuit against them. What do you think that right now, with the existing laws of the land, that SEC Chairman Gensler has the ability to regulate crypto in a more meaningful manner, or does he really need you, and by you, I mean Congress to grant the SEC better and clear authority.
That's a great question, and I think the answer is there are probably some crypto projects, some protocols and associated tokens that really are securities and therefore should could and should be regulated by the SEC. But I think many many are not. And that's my fundamental difference with Chairman Gensler. He maintains that virtually all cryptocurrencies are securities. He will acknowledge that bitcoin is not. I don't think you could
get him, well, I suggest you try. I have not been able to get him to identify a single other token that is not a security um and I think his argument is tenuous. And part of the problem is I think there has not been sufficient clarity as to what does institute a crypto security and what does not. By the way, you could use crypto tokens in a
transaction that definitely falls under the jurisdiction of the SEC. Right, so Celsius and Voyager when they're taking crypto deposits, paying an interest rate on it, using those deposits to then lend to I suppose hedge funds and other institutions that that definitely I think falls under the SECS brief And frankly, I think there's questions about why after an enforcement action against block Fire earlier in the year, nothing happened to
Celsius and Voyager until they blew up. But but that's a little bit different from the question of why is it that every crypto project other than bitcoin is a security. I think legislative guidance that would make it clear what is and what is not would be very very helpful and and I would say to things if I could, that ought to cast serious doubt on German Gunstler's argument. One is there are many projects where there is no centralized authority, right that that Bitcoin is an obvious case,
but it's not the only one. And if you have a truly decentralized platform, you have you have code, you have software, that's what it is, and the fact that people are using it doesn't mean that there's a central authority, And the idea of a central authority really traditionally an issuer is at the heart of what makes something a security. The other thing I would point out is that every security that I can think of involves a claim on an issuer. Right. If it's equity, it's a claim of ownership.
If it's a bond, it's a claim on the assets. Right, there's a specific claim, and there's usually also a specified return. Either it's an interest rate, or it's a dividend, or it's a promise of some share of income. Well, crypto doesn't typically have that. There may be some tokens that do, and okay, I'll call them a security, but when there is no claim on an issuer, when there is no built in return, then I'm not sure it should even
pass the Howe test. So and at a minimum, I think you have to acknowledge that it's very different from all the securities that we have acknowledged over the years, and so that's why I think really Congress should act
on this and specify how these projects ought to be regulated. So, speaking of things being very different, one charitable interpretation of the sec S sort of ad hoc enforcement approach is that it has to do with the pace of innovation and crypto just being different to anything we've really seen before. So maybe it makes sense for the SEC to try to maintain flexibility and kind of learn urn and develop
alongside the industry. I've also heard people talk about, well, if they codified everything, made it really really clear what the rules actually were, then inevitably there would be crypto players who start poking around for loopholes and trying to exploit those and that sort of thing. What do you
say to that interpretation of the SEC and Ginstler's approach. Yeah, I don't think that's a strong argument, because it really seems to be arguing for ambiguity and hiding the ball and ensuring that the both consumers and developers just don't have clarity on this. Look at it from the point of view of a creative developer who has an idea for an application of a smart contract. Maybe, but it's got to run on a Layer two protocol, and is
concern is he really doesn't know. Is there a way to design this so that it wouldn't be considered a security or do I have to go to bed every night wondering whether the SEC has going to come knocking on my door in the morning and accuse me of dealing with you know, I'm unregistered, therefore illegal security. That that's where you end up, That's where we are now, and that's where you end up when you don't provide the clarity that both consumers and developers deserve. Okay, well
you're working on legislation. What is it going to say or what would you like it to say to resolve these ambiguities. Well, the first thing I'm working on is actually I think of it, at least conceptually, as preceding some of the things we've been discussing, and that would be legislation that will provide guardrails for regulating stable coins. As as you know, right, stable coins are the currency that's used to go in and out of crypto generally. It's also in some ways I think the easiest and
simplest challenge for Congress and for regulators to solve. So I've I've introduced legislation or draft of a bill that deals with the category of stable coins that I think could plausibly be widely used as a method of payment, and that that would be asset back stable coins. I think algorithmic stable coins are in a different category. But what what we define? What I define as payment stable coins and are backed by assets, I think a regulatory
regime makes sense. It would it would require, for instance, rules about disclosure, what is the nature of the assets. It would require that you'd have to be licensed to issue it, and then we go through you know, how you could go about obtaining such a license, and if you have them, then you'd have to have high quality assets, liquid assets backing at cash and cash equivalence. We talked
about the capitalization that would be necessary for the issuing entity. Anyway, the point is we lay out the criteria by which this could be regulated, and I think it would make a lot of sense to start there. I could imagine you could start in other places, but that's that's my my first ambition in this space. What's the best approach in your opinion to protecting consumers when it comes to crypto and tokens? So you know, my approach here is the same as it is in most in most areas,
which is to have a lot of respect for consumers. Right. I think sometimes some of my colleagues and some of the regulators adopt the really paternalistic approach, and they want to protect consumers from themselves, and they want to put all kinds of regulations about who can do what and under what circumstances. I don't I don't view the world that way, the way I think we ought. What I think we ought to do is make sure that consumers have enough information to make a well informed decision about
what they want to do. So it's about for me, it's mostly about disclosure. With the stable points, for instance, the heart of the regime that that I'm advocating is full disclosure, audited disclosure, attestation of continuity of the assets backing the stable coin. That's the heart of it for me, and I would take a similar approach to non stable
coins other other crypto projects. I just want to press further on this because I feel like where people have lost a lot of money, yes, people also gain money, and I think I take seriously your point about respecting the consumer or the investor, But where people have a lot of risks are not stable coin as their projects that have been you know, eye popping returns and big ap wise and defy protocols where you can earn ten
thousand percent, etcetera. And there is no right now from as far as I know, there's nothing remotely like the equivalent of say like filing a ten queue for those projects. So it's very hard to have like should you know, should a defy project that someone launches, some sort of lending protocol, have some sort of minimum disclosure that some
kind of resembles what a stock disclosure looks like. I would say, if the if the nature of the arrangement that you're describing is one in which there is a return that is offered or promise, and yes, then it starts to look a lot like a security or at least the activity is the is the activity of a screen.
You know, if if you said, give me a bushel of apples and I will give you an apple a day, and at the end of a month, I'll give you the bushel back, I would say that actually looks all out like a security arrangement because of the return that you're offering, and it probably actually meets the Howie test. But it doesn't make the apple a security, right. The apple still just an apple it but the activity is
something that that is appropriately regulated. So if you have a crypto project where someone decides, hey, I'm going to offer this return to an investor because I'm going to you know, I've got this clever way to cover you know, on eye popping interest rate it describe it, then yeah, that probably requires regulation and certainly disclosure. What's your take on the treasury sanctioning of a piece of software, and of course talking about Tornado cash. Is it legitimate for
the Treasury to sanction a literal piece of software? And if not, how should we think about I mean, you mentioned the importance of privacy and the importance of cash, but there are issues you can only you know, it's hard to transfer a high volume of cash, and that's sort of the protection against money laundering, which is that
you could theoretically do it, but it becomes cumbersome. Do you think there is legitimate for the Treasury, as part of either anti terrorism or anti money laundering or going after North Korea to sanction a piece of software? And is that a worthwhile pursuit in some manner? So there's a lot to try to impact there, and part of it, you know, in all candor, is this is this is new and I am still really trying to make sure I understand the implication of this. My first reactions, I
get very concerned about sanctioning code. That does worry me. That concerns me. I think there's significant First Amendment issues. I think that is problematic. Having said that, I do acknowledge that there is an illicit activity that we want to be able to identify, and if we can't prevent it, at least go after the bad guys when they engage
in it. What I would suggest is the wrong way to do that is to take this archaic system that we now impose on banks and other financial institutions and apply it now to this whole new technology you know I'm referring to, like the the reporting rules. Every transaction over ten thousand dollars has to be reported. So what we know for sure is that some percent of these
reports are are false positives. Right, there's nothing wrong with these transactions, but we haven't even raised the dollar threshold since the nine seventies, not even to reflect inflation, and so we just have this massive reporting requirement. It's quite onerous to comply with, and it swamps the Treasury with
all kinds of this information. What I think we ought to do, and I'm not an expert in this area, but I've spoken at some length with people who are is, use artificial intelligence on an open source blockchain and use that technology to discern suspicious transactions. Don't just assume that everything is suspicious because it's more than ten tho dollars.
Don't just import this, you know, completely really in many ways obsolete technology and impose it on crypto, but use the tools that we have now, and and there are private companies that do this already. Right then, we've had these great stories of recovering stolen crypto, even because this is totally traceable. Now with Tornado, I understand part of the purpose is to make it much more difficult to
trace that. So it does raise some additional challenges, but I'm not convinced that the right answer is to apply the current bank reging monitor. So just when it comes to Congress and crypto, there's been a lot of discussion about the possibility of Congress actually, you know, maybe passing something to decide who actually regulates crypto. Is that the CFTC, is that the SEC? Is it something totally different? What's the likelihood of Congress actually legislating on this or the
legislation getting passed. And then secondly, does political appetite to interact and um legislate crypto? Does it change depending on what's going on with the industry. I mean, we're in a crypto winter right now. A lot of people have lost quite a bit of money. Does it feel like there's more political appetite right now to do something about the industry than before. I think the answer is yes,
at least in some respects. So for instance, I believe that when Terra and Luna collapsed, it seems to have elevated the issue of stable coin regulation with the White House and with the Administration in general, and with some
of my colleagues. So that real world event, and even though it's an algorithmic stable coin, and I think the most likely regulation on stable coin will actually be for payment stable coins, the fact that there was a sort of sensational bad event did move this up the list of priorities, put it on people's radar who didn't have it on their radar. So I do think what happens in the crypto world does beer on Congress's inclination. I still think there's a chance to get stable coin legislation
done this year. I think the administration would like to get something done. There are Republicans pretty overwhelmingly would like to get something done. Some Democrats would as well. On the broader outside of stable coins, the question of ordinary if I can say, you know ordinary crypto project, right, what does that mean, but but non stable coin, let's say that's that's tougher. I think it's more difficult. You
do have a bipartisan bill. You have actually two bipartisan bills, right, they're they're they're different, the Lummis Jilla Brand Bill and the Stavana Bozeman Bill. So you're starting to see some engagement by members and members on relevant committees of jurisdiction. So my I'm still going to hold out hope we get a stable coin build done this year, and next
year Congress might do considerably more. You know, I understand that, you know, stable coins are the low hanging fruit because they're pretty straightforward, particularly the asset back lines, where really the requirement is if you're going to have a dollar stable coin, have a dollar equivalent in a bank account, and let an auditor verify that it's that one to one. But obviously the you know you mentioned the terror Luna collapse knows an algorithmic stable coin, it would not be
covered under that. When you get into this more defy areas, and I get I want to push on this a little bit further. You think of some sort of like defy exchange like unit swap, which is a piece of software. But to most people looking at it, it looks like a stock market, and it looks like an unregulated stock market.
At that it looks like there's a bunch of different stop like things that you can buy, and you can go there and you buy them an any amount like you would at like you know, if you're using robin Hood or Schwab except their crypto. Does that is that acceptable? Is that? Do we need some sort of rules on defy? Like can this go on this sort of active trading in various protocols and way in which nobody really has any sort of disclosure requirements at all? Is it tenable?
Not politically right? I think that there will be political pressure to do something, and I could probably support some kind of disclosure requirement, but you know, again, I'd go back to the fact that I think we ought to respect the judgment of consumers, and you know, I think with some minimum disclosure, a consumer can decide do you want to trade on unregulated, automated, decentralized crypto exchange or
do you want to go a coin base? You don't, You don't have to, you know, it's not like you've only got one choice. You've got multiple choices. I think that's an acceptable place to lend. Now, I probably personally would favor a lighter regulatory touch than most of my colleagues. Who knows where that ends up, but I think I
think consumers can generally make good decisions for themselves. So just on this point, there's another aspect of Gensler's sec that you're critical of, and that is the proposal for more climate disclosures. How does that square with you know, your broader message on crypto, which is, give consumers more information, get better disclosures, and then let them make their own decision. Why isn't that the same case for companies and e s G mandates and things like that. Well, well, it's
very very different. First of all, we're starting from a point with crypto where there is zero regulation, right, There is no requirement, there is no regime, there is no disclosure, there is nothing, And so we're having a conversation about, well, is there anything at all that we ought to provide?
And I'm suggesting, yeah, there probably is some. You can't even begin to make that suggestion about or securities, right, I mean, my god, we go way overboard in terms of all the disclosures that are required useless information that
nobody reads, that does not helpfully informed investors. And what Gary Ginsler is doing now with this proposed climate rule is to add this massive new category, many multiples of more expensive than all the rest that's ever been applied before in terms of the cost of compliance, and it's not even financially material to the issuere right, So where they're proposing that somebody, by virtue of the fact that you issue stock or bonds on an exchange, that you
have to disclose not just the amount of c O two that your business operation releases, but you've got to figure out how much CO two is released by the source of the energy that you purchase. And then, in in the what I think is the height of absurdity, you're supposed to figure out all the CEO two released by all of your suppliers and all of your customers. This is ridiculous. It's not even possible to comply with, I don't think, and it's not meaningful, and there's no authority,
by the way, for the SEC to do this. You know, the the authority for the SEC is to require the disclosure of material information, and I think that's always been understood to be financially material, and here we have this really speculative guesses about c O two emissions by your customers. Uh, this is way way beyond anything that Congress is authorized, in my view. Senator pad to me, thank you so much for coming on odd lock to really appreciate you taking some of your time to chat with us. Hey,
thanks very much for having me. Senator paid to me, is really plugged into crypto? Yeah, I'm kind of wondering, like, is he like hanging out like field farming or something. Is he like in the No, he's like like for for an elected official. He clearly obviously, Look, you know, it's sort of he has this sort of regulatory, light touchstance, which I think is not particularly surprising given his political ideology.
But he uh, you know, you hear from some people in d C and this is this big thing that's coming and they don't seem to be particularly plugged in or no the arguments or anything. But that's clearly not the case with him. No. You know what I can't believe after listening to that conversation is that we've never done an episode on the Howie Test. How have we
really not? No? I think It's come up at various times, especially in very early crypto interviews, maybe with Matt Levin at one point or another, but we've never done an episode specifically on that, but we probably should. To the senator's point, it is kind of crazy that we're trying to relate, you know, tokens and defy to a Supreme Court precedent that was set in the nineteen thirties. It's
really tricky. And you know, to his point, like, disclosure is a good seems like a disclosure seems uncontroversial, right, disclosure is good, and maybe there's a level of disclosure
that's appropriate for a crypto. I still don't even know like how it would work in practice, because look, you could just have someone in Estonia, like you just it's just to create a piece of code that interact with another piece of code and it lives maybe on the ethereum blockchain, as you know, an e r C twenty token.
How do you enforce that and how do you are you going to enforce like defy exchanges that operate in the US to block I think, like, I think this is going to be very tricky because even an uncontroversial idea like some sort of disclosure I do. I don't even see how you go about and forcing that against like you know, it's like you know Pickle Farm, well the but no, sorry, I gotta credit Frank Chaparo over at the block always like hiss, like he's like, how
are you going to regulate pickle? So I think that got stuck in my head. Okay, all right, But the big issue that I see is that actually a lot of crypto projects already have excellent disclosures and are quite transparent, and you can go and look at the source code and try to understand it, and yet that doesn't stop anyone from doing stupid things like Tara Luna right, like, you knew how that worked. It's an algorithmic stable coin.
You could see what was supposed to happen, and people talked about the nightmare scenario of what would happen in a panic, and then exactly that occurred. The whole thing collapsed. It's not like we didn't have disclosures. So I guess my question is like, how do you, yeah, does it actually change that much now? And you're absolutely right, like you can you could. I've seen people make this argument that actually it's all extremely transparent. It's all right there
on the chain. It's a it's a public blockchain, and you can look at like you know, the get hub uploads and read the code. The problem is, like there's this huge gap right between the people who are like buying tokens from money versus the people that can actually look at code and understand the token omics of the code. I don't know. I think even uncontroversial ideas like the stable coin regulation, it does not strike me is that hard.
But even there it seems tricky because you could have again someone outside the US launching something that's called a stable coin that's algorithmic, and suddenly like where do you go? So I think there's this like little bit of low hanging fruit, would like say the U S. D C's of the world, where you can sort of very transparently audit do you have a dollar or do you have a dollar's worth of what the SEC considers catch equivalence? Okay, you're good. But I think beyond that, like regulation is
just going to prove to be very tricky. And I'll say one other thing, you know, is he pointed out that look a lot of these aren't like companies in the sort of traditional sense. Maybe they don't they're not Howie or whatever. They don't pass, but like they're not companies, but they do have teams and many of them are on Twitter and not anonymous, and they kind of look
like companies. Okay, Despite all these questions, I think one thing is clear, which is it does feel like we are kind of coming to a crunch point on some of these issues. Like there is enough momentum right now in d C and elsewhere to actually start thinking about this. The industry is big enough to start thinking about how are we actually going to regulate it? Are we okay with the status quo? Or do we want to do
something different. I have a feeling we're going to be talking about this a lot more, and it was great to hear from him, and yes, a lot more coming on this. Okay, shall we leave it that. Let's leave it there. This has been another episode of the All Thoughts Podcast. I'm Tracy Alloway. You can follow me on Twitter at Tracy Alloway and I'm Joe Wisn't Though. You can follow me on Twitter at the Stalwart. Follow our guests on Twitter. Senator pat to Me, He's at send
to Me. Follow our producer Carmen Rodriguez at Carmen Arman. Follow our substitute producer for this episode, our colleague Dashel Bennett who filled in. He's at Dashbot and want to give a big thanks to our Bloomberg booker colleague in d C. Matt Shirley. He's on Twitter at Matt or Shirley. And check out all of our podcasts at Bloomberg unto the handle at podcasts. Thanks for listening.