US Senate Banking Committee Asks ‘What Are Cryptocurrencies Good For?’

Sherrod Brown and Elizabeth Warren paint bitcoin’s populism as phony marketing.

Sherrod Brown and Elizabeth Warren paint bitcoin’s populism as phony marketing.

This episode is sponsored by NYDIG.

Today on the Brief:

In today’s main discussion, NLW addresses not one, not two but three crypto hearings today spread across the Senate and House. One with a focus on ransomware, another on central bank digital currencies and the last a wide-ranging outlook at the value of cryptocurrencies versus their perceived risks.

One of the notable themes from the Senate Banking Committee hearing was disbelief in cryptos as populist, democratizing, decentralizing tools for remaking finance. Instead, political opponents argued that they were just the play places for shadowy cabals of miners and “super coders” (yes, that’s a term they really used).

More concerning is the argument that cryptos are increasingly a threat to the larger financial system. Where does crypto stand in the eyes of regulators following the hearings?

The Breakdown is written, produced by and features NLW, with editing by Rob Mitchell and additional production support by Eleanor Pahl. Adam B. Levine is our executive producer and our theme music is “Countdown” by Neon Beach. The music you heard today behind our sponsor is “Only in Time” by Abloom. Image credit: Sarah Silbiger/Stringer/Getty Images, modified by CoinDesk.

Transcript

What's going on guys? It is Tuesday, July 27 and today we are discussing the latest hearings on cryptocurrency in Congress in the Senate and how the U.S. Senate is asking "what are cryptocurrencies good for?" First up, however, let's do the brief. First on the brief today, exchanges are leaving China. So, China FUD in 2021 has proven itself to be a very different thing than in years past. For a while, it seemed like everything was just rehashing old policies and old bans. But, when the Vice Premier of China started discussing bitcoin mining, something major shifted. We could tell that this time was different because of the reactions of miners. In the days after the VP speech, they started liquidating their crypto, selling mining rigs, and generally figuring out how to make some big moves away from China. In the following weeks, provinces started implementing new policies. At first, it was just banning mining in areas powered by coal. But soon, even hydro-powered mining became unwelcome, and it was clear that there was a true sea change. We've subsequently covered the Great Western hash rate migration and everything from what it means for network security to political implications. However, as all of that was going down, some were asking whether other parts of the crypto industry in China would follow suit. If a lot of the concerns from the Chinese government had to do with social stability, wouldn't crypto trading seem a bigger concern than the relatively self contained Bitcoin mining space?

Well, it's now a couple months later, and news broke today that the founders of both the Huobi Group and the OK Group are dissolving their Chinese entities. These exchanges had already moved their trading business out of China years ago after the PBOC ban on ICOs and centralized fiat to crypto trading, but they still have a significant Chinese user base as well as employees that are still in the country. Both exchanges downplayed the move in statements. For example, from The Block quote, “A Huobi spokesperson said that because the Beijing entity, quote ‘has not had any business operations,’ it is unnecessary and has applied for cancellation.” Taking a step back, it's pretty clear that China is in the midst of really flexing its power when it comes to the private sector. Stock markets have been rocked in recent weeks by moves such as their recent, effective ban on all for-profit education companies, which ripped billions off of the market cap of numerous firms. As Dr. Parik Patel, FinTwit’s favorite meme account, put it quote, “First Jack Ma goes missing, then penalties on Didi, then a crackdown on the education sector. The Chinese government really doesn't want to see stonks go up.”

Next up on the Brief today, Binance’s regulatory fight. Obviously, I've been following a lot of the ire that Binance has been receiving. Over the last month or so, a number of jurisdictions around the world have basically told them that they have no legal standing to operate in their countries. This has happened from the U.K. to Italy to Japan to the Cayman Islands. At a press conference today, the implications of this ratcheted up to the next level when Binance’s iconic leader CZ announced that they were looking for a replacement and not just any replacement. Quote, “We are looking for someone with a strong regulatory background to step in and be CEO.” Now this is an obviously big deal. Binance has already made some moves along these lines, hiring Brian Brooks, the former Coinbase lawyer and former acting Comptroller of the Currency of the U.S. to be the CEO of Binance.us. CZ clarified that Binance doesn't feel an urgency to get him out right away. But that as the nature of the company changes, the right person for that role might change as well. Effectively, the story they're painting is that Binance is evolving from a tech startup to a regulated financial institution, and that will necessarily bring some changes with it. Those include not only potential leadership changes, but also more formally organizing and key jurisdictions with real headquarters. Still, net net, There is no doubt that looking for a new CEO candidate is the biggest news here.

Finally, in the Brief today, a continued boatload of fundraising in crypto land. I did a show last week about just how much private capital continues to flow into crypto and that has shown no signs of stopping. The headliner this week so far is Fireblocks raising $310 million on a $2 billion valuation. They provide custody and other digital asset services. Basically, they're an infrastructure company. They've helped transfer over $1 trillion in digital assets and their client base has grown 400% just this year, I saw someone tweeted that the first crypto infrastructure unicorn, in other words, not a protocol and not an exchange. And I couldn't strictly verify but this seems correct or at least close to me. As always, though when it comes to fundraising I'm interested in who was involved and there are a large number of traditional VCs, here more than crypto VCs, to be honest, but also the venture arm of Siam Commercial Bank, which is Thailand's biggest bank. Another big fundraise today was from Eco who has raised another $60 million. This is an interesting project that has been around for a really long time. It was incubated by Uber founder Garrett Camp during the last Bull Run, and has gone through a number of different iterations. Its current focus is a digital wallet that will serve as a gateway for a full suite of financial services. The company is now being led by Andy Bromberg, who was formerly the head of CoinList and reportedly has 180,000 people on its waiting list. On top of Eco and Fireblocks, there were a slew of other smaller $3 to $10 million raises. So, take it all together, and it's clear that investors are still absolutely convinced about the long-term trajectory for this space.

With that let's shift to our main conversation and some people who are decidedly less convinced about the long-term trajectory for this space. There is a crazy amount of regulatory discussion happening today. Not one, not two, but three hearings all simultaneously concurring. The Senate Judiciary Committee is holding a hearing titled “America Under Cyber Siege: Preventing and Responding to Ransomware Attacks.” This one, we don't know exactly how much crypto is going to come up. There's no hearing memo for it or witness testimony. But it seems pretty likely that it comes up somewhere. One of the witnesses who's speaking here also spoke at a House Committee on Homeland Security hearing last week, saying then that, quote, “The rapid expansion of cryptocurrencies, as well as other digital stores of value presents a significant challenge to law enforcement and a growing area of risk to the U.S. and our foreign partners.” The House Financial Services Committee is also holding a related hearing, this one called “The Promises and Perils of Central Bank Digital Currencies.” This one is being held by the Subcommittee on National Security, International Development and Monetary Policy, which earlier this year held a hearing on how crypto might be used in terrorist financing.

Still, it's the third hearing that is definitely the main event for those of us in the crypto industry. It's being held by the Senate Committee on Banking, Housing and Urban Affairs, and it's called “Cryptocurrencies: What are They Good For?” The three witnesses invited to give testimony at this one, were Angela Walch, St. Mary's University School of Law professor and frequent crypto critic, but who I should point out hasn't made her entire career on just sh**ting on the crypto industry or repeating any random FUD that happens to come her way just for the sake of some cheap engagement. In other words, she often has critical opinions, but from what I've seen, they're usually presented in good faith. other guests included Jerry Brito, who's the executive director of Coin Center, and Marta Belcher, who is the foundation chair for Filecoin, which many noted was kind of a weird addition. It's not Marta's fault, but anytime you have someone who represents one specific coin, inevitably, there's going to be some bias towards what that protocol or coin does. But, either way, let's talk about what went down. Some of the key themes, intermediaries, there was a lot of discussion about whether miners for example, were financial intermediaries. And these questions are super important as it relates to regulatory obligation. If miners and node operators are designated as financial intermediaries for their role in confirming transactions, it could create an absolute mess. My belief is obviously that these actors represent a fundamentally different type of relationship than intermediaries and centralized financial systems. And Jerry Britta is on that same page as well. He said that the right comparison is to the internet itself to ISPs. And he also pointed out that New York's bit license explicitly excluded miners, given how draconian that legislation is, hey, hey, give it up for those of us in New York, that's kind of a positive precedent to be able to point to so at least BitLicense has given us that.

Ransomware, as you might expect, its role came up a bit and unfortunately, much of it was very blustery and hyperbolic. Same with the discussion around CBDCs, which are seen by many apparently as a global competitive threat. Interestingly, this committee did get a little more technical than some others. There was a discussion of just how secure and unhackable things were and even a discussion about MEV, Miner Extractable Value, which is a big conversation in the context of Ethereum right now. A lot of the discussions seem to be focused on whether there needed to be new regulation. As someone on Twitter pointed out though, there was a bit of a conflating of unregulated versus acting in defiance of regulations. Someone mentioned unregulated derivatives markets and crypto but as Adam Cochran pointed out, quote, “That's a misnomer, right? That if those are derivatives and there is no other exemption, then it is regulated and someone is just acting in violation.” For me personally, I think the dumbest comments award goes to Senator Harry Reid who basically said that when we got the internet, it killed newspapers, so how can we kill less things with this disruption? And one positive take from crypto Twitter came from Maya Zehavi who said “Honestly, I’m actually impressed by this Senate hearing. They managed to mention dissident tech, Arweave, MEV and identity.”

But still overall, the tone was contentious with Senator Sherrod Brown and Elizabeth Warren being particularly vitriolic. It seems to me that the theme they're going for is that all of this populist appeal that crypto seems to have is just bulls**t marketing. Brown said in his opening statement quote “There's nothing democratic or transparent about a shady diffuse network of online funny money.” He went on to say that there should be smart regulations to protect consumers from crypto “extortionists” and quote, “their phony populist marketing.” as Danny Nelson on CoinDesk put it, he painted the industry as a “fraud ridden, accountability dodging, digital slot machine.” Senator Elizabeth Warren picked up those themes, again from Danny Nelson quote, “In her telling, Bitcoin decentralization is a fantastical narrative the network's true power brokers, miners and corporations, leverage to achieve false moral supremacy over big banks.” Warren said, quote, “instead of leaving our financial system at the whims of giant banks, crypto puts the system at the whims of some shadowy faceless group of super coders and miners, which doesn't sound better to me.” Holding aside the lack of a definition around what a super coder is, Warren also wrote a letter to Janet Yellen today in Yellen’s capacity as chair of the Financial Stability Oversight Council, the FSOC, requesting that she quote, “Address cryptocurrencies’ risks and ensure the safety and stability of our financial system.” Her longer quote says, “I've become increasingly concerned about the dangers cryptocurrencies pose to investors, consumers and the environment in the absence of sufficient regulation in the United States. However, as the demand for cryptocurrencies continues to grow, and these assets become more embedded in our financial system, the council must determine whether these trends raise concerns beyond investor and consumer protection and extend to broader systemic vulnerabilities that could threaten financial stability.”

The thing that's frustrating about her analysis is twofold. First, this idea of the shadowy cabal of actual people who run the industry has been sort of disproven, the block size war showed just how constrained the power of corporations within the Bitcoin ecosystem is. In fact, that's one of its biggest selling points. And second, for me, it's nearly impossible to watch Warren speak about these issues, and not just see a person who has spent so many years fighting what she sees as shady corporate power, that those patterns start to present everywhere. In other words, she can't come to crypto with fresh eyes. Instead, she is a slave to her priors that see money as corrupting inherently, and democratic governance as the only counterbalance. This gets to an emerging narrative that I've discussed before the idea of cryptos representing a systemic risk and not just a self-contained risk. That's what this particular set of Democrats shaped by the great financial crisis are most scared of, and I think it's something we need to keep our eye on.

This hearing sadly, sets out a lot of what I believe we face going forward and it's not the only regulatory action we're getting this week either. Gary Gensler is expected to explain what he sees as the SEC’s authority in regulating cryptos as per request from you guessed it, Elizabeth Warren. So anyways, guys, a lot of interesting things going on the regulatory continues. As I said before, I think we have to go through it. So I'm not scared and I don't think it's cause for concern. But the specifics are worth noting and paying attention to and of course, trying to influence the conversation around. So, I appreciate you listening. I hope you're having a great week. Until tomorrow guys, be safe. Take care of each other, peace!