Evolving Money: The Regulation Revolution (Sponsored Content)

Because you're a subscriber to this Bloomberg podcast, we thought you'd be interested in a sponsored podcast called Evolving Money, produced by Coinbase and Bloomberg Media Studios. It explores how money has changed over the centuries and whether cryptocurrency is just the next logical evolution of how we pay for things and store long term value. Here is a recent episode.

It's been nearly fifteen years since a computer programmer named Laslohnyez famously spent ten thousand bitcoin for two Papa John's pizzas, the first ever purchase using bitcoin.

At the time, those.

Ten thousand coins were worth only forty one dollars. Since that landmark moment, the digital currency has traveled an uncertain road, which isn't unexpected. When new financial practices gained traction, regulation is usually slow to catch up with the new reality. As a result, throughout its short history, the crypto market has been plagued by regulatory uncertainty.

But last year things started to shift.

One of the first big breakthroughs came when federal regulators approved an ETF that tracks bitcoin. Then came election Day, which was a game changer. A record number of pro crypto candidates on both sides of the aisle one at the state and federal levels, with the most pro crypto Congress ever on its way to Washington. On December seventeenth, Bitcoin closed above the one hundred thousand dollars mark for

He's a controversialist, he's a satirist, a very patriotic supporter of Ireland.

That's Daniel Carey, professor at the University of Galway in Ireland, where his work focuses on money and the economy in the Enlightenment. With the success of Gulliver's Travels, Swift became newly rich. With his now substantial personal wealth, Swift decided, hey, why not try to do some good well.

Swift clearly has a sympathy with those who are trying to get by dealing with you know what.

We would call liquidity issues.

They've gone debts that they have to call in, they have bills that they need being repaid. He decides to make person loans.

He approached farmers, builders and entrepreneurs he knew, offering loans of five to ten pounds roughly thirteen hundred to twenty six hundred dollars in today's money, and Swift didn't ask for a cent of interest on these loans.

Swift's idea was a smashing success.

Soon networks of peer to peer loans began popping up across Ireland, an unofficial system providing crucial liquidity and startup funds to people who had no access to financial institutions.

It is significant in terms of enfranchising people and giving them a little bit of a sense of reward for what Swift thinks of as their honestry and their commitment and diligences tradespeople.

Even as this informal system spread and its benefits became clear, the British Parliament didn't formalize or ban these peer to peer networks, and that lack of structure limited the scale of their growth. It wasn't until seventy eight years after Swift's death that Parliament passed legislation to formalize what he created.

The legacy for Swift is probably in systems of microcredit, which for most people are relatively recent in terms of their thinking about what can be achieved through supporting industrious but impoverished people.

Fast forward to the late nineteen nineties, when online technologies began to inspire a resurgence in the kind of peer to peer lending that Swift made popular centuries earlier. Instead of a wealthy merchant going to a farm to lend a worker a few pounds, now online platforms could match individual lenders with borrowers. It took nearly a decade for the Securities and Exchange Commission to regulate P to P

These are just evolving systems. It takes a long time to evolve that and to develop systems of trust.

Taken to extremes, government regulation can be the enemy of innovation, stifling change. But as the history of peer to peer lending shows not once, but twice. Instituting the appropriate regulation can also normalize new kinds of financial practices, Innovation can accelerate, and even more opportunities open up for crypto. It appears that breakthrough moment has arrived.

I got my start in crypto about a decade ago and had started working for coinbase here in Washington, d C. Was really one of the few lobbyists on the ground that was working on digital asset issues, crypto issues, blockchain technology.

This is Kara Calvert, vice president for US Policy at Coinbase. As an advocate for financial innovation on Capitol Hill, Kara has seen how slow regulators and institutional investors can be when it comes to embracing something new like crypto.

When I first started working on these issues, it was much more viewed through the lens of technology, and really it was so new and nascent that nobody really knew what to think.

As the crypto industry has grown, the SEC has sent mixed and often confusing signals. Rather than regulating crypto through new roles that treat it as the financial innovation it is, the SEC has insisted crypto fits its existing set of roles that approach has led to some murky and seemingly arbitrary classifications. The SEC, for example, considers most digital assets

In twenty twenty three.

The SEC alleged that Coinbase had been acting as an unregistered broker. That's consistent with its view that most crypto products are no different from stocks, bonds, and other securities. But Coinbase and other crypto companies targeted by the SEC have argued in court that digital assets are different and that it doesn't make sense for them to be treated the same as existing financial instruments.

We have been working and really tried to work with regulators from the beginning. When Brian Armstrong founded this company, it was to be the mostested, in, safe and secure way to transact in digital assets, and in order to do that, you have to work with regulators, and so I think the SEC over the course of the last four years had very much a yes, you can come talk to us, but well, listen, we may not give you anything in return.

Kara says that the absence of clear rules has stifled industry wide progress that.

Created a real depression I think on innovation here in the United States and ultimately resulted in a lot of startups and more importantly, the investors in those startups saying, let's go overseas. There's a better way to do this in one of these jurisdictions, not a deregulated jurisdiction, a regulated jurisdiction.

There have been signs that the legal tide might be turning. In twenty twenty three, the SEC sued Ripple, a firm which provides digital asset infrastructure to financial services companies, for violating securities laws, but the judge sided with Ripple, ruling that it didn't break the law when the currency it created, XRP, was sold on public exchanges. The industry's momentum continued when the SEC approved an ETF that tracks the price of bitcoin.

I do think it paved the way for retail investors other investors around the world to have access to our very deep in liquid markets in the United States, and I think that was very much a turning point for many people.

As for Coinbase's battle with the SEC, in March twenty twenty four, a Manhattan federal judge found quote the challenge transactions fall comfortably within the framework that courts have used to identify securities for nearly eighty years, setting the stage for a jury trial. But then in January she granted Coinbase's request for a pre trial review of her March order by the Second Circuit. Those sorts of interlocutory appeals

You have seen now Europe is ahead of the United States in a innovative technology which doesn't happen that often. And we're actually very excited about the work in the EU and working with our counterparts and with regulators In the EU, they developed a very clear framework and they're going to be implementing that soon. You have the UK, Singapore, Australia,

So why has the US government in comparison been so slow to create a federal framework.

The foundational regulatory framework that we're working with in the United States is frankly more complicated. We have a bifurcated system where we determine what is a security and then what is a non security or a commodity. And in the rest of the world they don't really have that type of differentiation, and that I think has allowed them to move more quickly. State regular market regulators two different market regulators that are in a tug of war. They

Today there's more hope than ever that the industry will finally get the regulatory clarity that will pave the way for wide scale adoption with widespread benefits for consumers and investors alike. While the SEC remained reluctant to regulate crypto and legal proceedings ground on in the courts, the crypto industry turned its attention to the third branch of government, Congress.

Ahead of the twenty twenty four election.

Knowing what was at stake, the industry mobilized to support pro crypto candidates, contributing more than one hundred and thirty million dollars to election coffers. Industry advocacy groups such as Stand with Crypto mobilized as well, organizing more than two million crypt do advocates through grassroots efforts, and come November, twice as many crypto supporters were elected to the House of Representatives as anti crypto candidates. The market's response was emphatic.

It's been a complete one eighty. You've got the most pro cryptocongress, you have a president, you have Republicans and Democrats all saying, all right, now we know more about this industry. It is maturing. We understand what the future might hold and why it's important. So I would certainly say the narrative has evolved. It's matured. You have more people at the table, and I think that's the exciting part.

Now with a new pro crypto administration in the White House, new leadership at the SEC gives the industry hope for change.

Now. I think the SEC really has an opportunity to write the rules that these are not rules that are deregulatory in nature. It needs to be because the asset is not identical to what we traditionally see in an

The CFTC is the US Commodity Futures Trading Commission, a government agency that's always been overshadowed by the SEC, but under the Trump administration, the CFTC is positioned to play a bigger role in regulation, working alongside the SEC for starters, Congress could empower the CFTC to regulate digital assets as commodities rather than securities.

Congress has a really important role here to ensure the CFTC has the federal authority to regulate these spot markets for digital assets, but also that the SEC can use to tailor and move in the right direction. And so the work of Congress to really make sure that we have something in law that can withstand the test of time. It can it can move through administration to administration, regulator to a regulator.

Among the topics the crypto industry hopes Congress and regulators will address is the status of stable coins. The discussion around stable coins is only intensified with the growing possibility of legislation that would facilitate their trading.

There are a lot of really important characteristics of stable coins that need to be captured in a federal framework.

Another simmering subject the industry hopes Congress takes on is d banking, the practice of lenders dropping cryptocompany and founders as clients.

If you can't get a bank account, it's pretty hard to start a new business. Stand with Crypto has brought more than one hundred founders to Washington to meet with lawmakers, and a really interesting piece of the puzzle for them is their banking services. And in almost every meeting they went into, they expressed concern that they couldn't have access to payroll or checking accounts. And we said, well, would you be willing to go raise your hand in public?

But less than a month into the new administration, that's already changing. Just a few days into his term, President Trump issued an executive order that fundamentally changed the federal government's approach to crypto Fulfilling a promise he made on the campaign trail.

The executive order really encapsulated those campaign promises, everything from ensuring that you can continue to self custody your assets, to ensuring that there's no central bank digital currency, to creating a working group to ensure that we stop the turf war between the different agencies and instead have them work together.

The new administration also quickly moved to counteract SAB one twenty one, an SEC bulletin that prevented a lot of financial institutions from entering the crypto space.

SAB one twenty one represents the staff accounting Bulletin number one twenty one. Think about what that represents. It is a staff letter, It is not a rule. It did not go through the proper rulemaking process with notice and comment. It was bureaucrats inside the SEC who decided to write an accounting bulletin that then imposed a new framework on the entire industry.

SAB one twenty one was a barrier that cut off access to banking services for crypto companies and kept banks out of the crypto business. Coinbase has always prided ourselves on being one of those access points, but when we think about the recision of ZAB one twenty one, it really allows other banks other financial institutions to engage as well. Within days of being appointed, the acting director of the

The front and honestly try to make sure that everybody can have banking services.

The industry is optimistic this newfound clarity will break down barriers and allow Americans to understand the promise of crypto.

So right now there are about fifty two million Americans who own crypto, So I think that there are investors and consumers. Really the consumption, I think is what people are excited about. The ability to say, all right, that I want to get into this because I think it's

Crypto has proven that it's pretty much impossible to predict the future, but the industry is optimal mystic that a new era is beginning when we.

Start to educate policymakers. They realize eventually this will be a ubiquitous like the Internet. But in order to get there, we have to create the framework, and that generally starts in the regulatory environment. That disruption isn't scary, It needs to be embraced, and we can in fact find a way forward that enables new economic opportunities. We're very optimistic.

Just as the growth of peer to peer lending in Ireland far outstripped the pace of royal regulation, crypto has burst onto the scene so fast we're only now seeing American regulators catch up. But now there's a clear path for regulatory clarity, unlocking a new future for companies, investors, and consumers, and accelerating the next wave of money's evolution. Thank you to Cara Calvert and Daniel Carey. This is Evolving Money, a podcast from Coinbase and Bloomberg Media Studios.

Thanks for listening.