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Why Former US Regulators Are Moving Into Crypto

The pattern continues as former Commodity Futures Trading Commission (CFTC) Commissioner Brian Quintenz joins Andreessen Horowitz (a16z).

September 10, 2021

This episode is sponsored by NYDIG.

Today on the Brief:

  • NFT volume cools down but interest remains strong
  • Mastercard is acquiring CipherTrace
  • European Central Bank and the Federal Reserve begin preparing for asset purchase tapers this autumn

Our main discussion is about the flow of regulators from the U.S. government into the crypto industry. NLW looks in particular at Brian Quintenz, who is joining Andreessen Horowitz, and Chris Giancarlo, the former CFTC chair whose new book is “CryptoDad: The Fight for the Future of Money.”

“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: Toya Sarno Jordan/Bloomberg/Getty Images, modified by CoinDesk.


What’s going on guys? It is Friday, September 10 and today we are talking about why former U.S. regulators are moving into crypto. First up, however, let’s get to the Brief. First on the Brief today, the latest in NFTs. There has been a pretty significant calming in the daily trading volume of NFTs. At its peak at the end of August, OpenSea hit $323 million in daily trading volume, which has now come back to Earth to hit $52 million yesterday. So, the obvious question is, was this all just a big bubble that now has popped? I find increasingly that it’s misleading to look at nearly any category, and crypto as a whole category, rather than trying to dig into its constituent parts. What I mean by that in the context of NFTs is that July and August’s big market run-ups were caused by specific interest in one, OG NFT sets like the CryptoPunks and Art Blocks, which is the first AI-generated art NFT; and two, profile pic PFPs or avatar NFTs, think Bored Ape Yacht Club, when we talk about “has the NFT bubble popped?”

The reason it’s important to break it down to this degree is that demand right now is so category-specific. The buyer of an NBA Top Shot or an NFT released via Tom Brady’s autograph is very different than the buyer of a Fidenza or a loot bag. What I think is pretty clear is that the last couple of months were largely crypto insiders excited about NFTs that were driving prices up. There were, of course, notably some celebrity outsiders, for example, who joined in on the fun like Steph Curry with his Bored Ape. But in general, most of its activity has been people who are already heavily enfranchised. From where I’m sitting, though, market sentiment certainly hasn’t gone away. That said, while it’s maybe a little exhausted for the moment and waiting for something that actually captures the community’s attention, it’s for sure the case that there’s an absolute crap-ton of crap out there too. NFT Discord resembles nothing so much as ICO Telegram from 2017. Lots of copycats, derivative projects and random terrible NFT projects frankly, hoping that they will somehow pump and turn into something real.

Now, two more points to reinforce this seeming like a breather rather than a bubble bursting. First, Sotheby’s just completed its auction of 101 Bored Apes and the collection sold for about $24.4 million, or around $241,515 per ape. This was 50 to 100% higher than Sotheby’s had itself estimated and reinforces that to the extent that NFTs are a long-term thing, they’re going to be subject to the same power laws like everything else, where a very small number of projects are the most desirable and everything else kind of fits in somewhere around it. Sotheby’s co-head of digital art said the Bored Ape Yacht Club project is one of the most exciting and creative NFT collectibles since the launch of crypto punks, and has become a major force in pop culture.

One more note on this before we move on, Pomp’s newsletter this morning was titled: “I made a mistake. NFTs are going to be much bigger than I anticipated.” It actually does a great job connecting three different explanations for why people like NFTs. Basically what Pomp is saying is that they live at this intersection of different tailwinds. The first and positive take is as he puts it, “the digital natives would rather own digital goods than physical goods.” A second take is that we’re watching the “real-time creation of a new status game. Each individual that would normally drop $50,000 to a million to purchase a car, watch, houseboat etc, is now realizing you can spend the same money on a digital good and flex in front of more people on the internet.” The last explanation is the macro explanation: “The less exciting perspective is that monetary and fiscal policy has created a manipulated financial environment. This means that many of the traditional assets, like bonds, now produce a negative real rate of return, which forces investors to push farther and farther out on the risk curve. The only way to drive returns and capture yield is to start doing things that you previously thought were insane, you know, like buying JPEGs on the internet for millions of dollars.”

Next up on the Brief, MasterCard is acquiring CipherTrace, a blockchain forensics company that scans the blockchain for illicit transactions. This was a surprise in the sense that there hadn’t been any rumors around it, but not a surprise in the sense that frankly, it just makes a ton of sense. MasterCard has been significantly ramping up their crypto efforts. In July, it announced it was piloting USDC as a method to bridge crypto payers and fiat-desirous merchants. It has also said that it plans to let merchants accept crypto through its network before the end of the year. The ability then to deeply and fully integrate crypto while also being able to keep track of illicit transactions and stay way out ahead of compliance just feels like a good fit. Now, this is of course, a really hot space: CipherTrace raised $27 million earlier this year and Chainalysis raised a $100 million series D that valued at $4.2 billion.

Third and finally on the Brief today, a little macro check. The central bank tapering picture is starting to come together and it’s getting clear that the toe they’re going to dip into the water is with reducing the pace and size of asset purchases. The European Central Bank said yesterday that it is going to “moderately,” that’s their quote, “reduce the pace of asset purchases under the pandemic emergency purchase program.” They said in a statement: “The governing council judges that favorable financing conditions can be maintained with a moderately lower pace of net asset purchases. Currently, the ECB buys about $20 billion in assets each month and around $90 billion in government bonds. That’s likely to go down to $60-70 billion in the coming months, with the program slated to run till at least March of next year.

Back in the U.S., meanwhile, the Wall Street Journal proclaims: “Fed Officials Prepare for November Reduction in Bond Buying.” The Fed is currently at $120 billion in monthly asset purchases and might start to try to phase that out from November through the middle of next year. But of course, those plans could always change. The most recent monthly jobs report was a real bummer, with the U.S. only adding 235,000 jobs in August compared to the 720,000 that economists expected and compared to the 962,000 in June and the 1.1 million in July, as it has been seemingly forever much will have to do with the public health situation.

With that, let’s shift to our main discussion. It’s about former regulators moving over into the private sector and specifically, crypto. But first let’s talk about something under current regulators in Europe, the European Securities and Markets Authority, ESMA, is an independent E.U. regulator that is focused on investor protection as well as promoting stable markets. They publish an annual scoreboard that prioritizes financial and technology innovations in terms of how they can potentially impact the ESMA’s goals. In their new 110 page report, “Trends, Risks and Vulnerabilities,” crypto topped the list. They say that is both a trending innovation as well as the threat to sustainable finance. They point to the environmental cost of mining, they point to volatility, and they point to DeFi and CBDCs and stablecoins as contributing to the risk across all asset classes.

Here’s an interesting section as reported by CoinDesk: “According to the report, a rise in risk-taking behavior and market exuberance are to blame for increasing volatility in equity markets. ‘Increased [risk-taking] behavior has led to volatility in equity (e.g., GameStop-related market movements) and crypto asset markets, as well as to the materialization of event-driven risks such as in the case of Archegos or Greensill,.” Now, the hubris it takes for governments to complain about risk-taking behavior and markets when the fundamental structure of markets and governments active intervention in them is the key underlying factor that has driven so much of that risk-taking. It’s just astounding. Stepping back though this report feels a lot to me like what we’ve seen out of the EU in the past, the acrimony towards stablecoins, the huge emphasis on environmental concerns. So, until I see something different, it feels like just more of the same.

But back over to the U.S. and former regulators. First, news has broken that Dan Berkovitz is leaving the CFTC, where he’s been since September 2018. Frankly, he is one that I’m not necessarily super sad to see go. In June, he went off on DeFi. Again from CoinDesk: “The regulator has warned in the past that certain products built on decentralized finance (DeFi) may violate federal laws, pointing to derivatives in particular. ‘DeFi markets, platforms or websites are not registered as DCMs [derivatives contract markets] or SEFs [swap execution facilities]. The Commodities Exchange Act does not contain any exception from registration for digital currencies, blockchains or smart contracts.’ He has also warned that there are no federal consumer protection regulations around DeFi trading platforms, and a lack of intermediaries may mean that certain protections that exist in centralized markets just don’t exist with their DeFi counterparts.”

My thing here is I don’t mind regulators trying to figure out where DeFi fits and wanting to fit it in. That’s what they’re going to do. But, there was both a certain level of antagonism that he brought to that speech that reflects to me the subset of regulators who have this bone to pick with us, as well as this idea of it was a glorification of intermediaries, he was basically saying that they’re worth the cost of the system because of the protections they bring. That may be a reasonable argument to start with, but it’s certainly not the argument I’d make. So, if that’s the place that someone is coming from, and they’re leaving their position of power, don’t let the door hit you on the way out, and best of luck for whatever comes next. Berkovitz, however, is the second CFTC Commissioner to step down in the last 45 days. Brian Quintenz served for four years and left in August. Quintenz, unlike Berkovitz, was a champion of crypto and new technologies throughout his tenure, right up to the last few weeks when he was pretty frequently on Twitter reminding the SEC that they weren’t the only regulator with an interest in crypto. Quintenz has joined Andreessen Horowitz part-time as an advisor: “The regulatory response to crypto innovation will be critical in whether an openly accessible, fully transparent and decentralized value-creating financial ecosystem can be truly achieved. I’m excited to engage with both entrepreneurs and regulators to ensure that full potential can become a reality.”

Now, this is very cool, but advisor at a venture firm isn’t really a full-time thing. So I anticipate we have a lot more to learn about what Quintenz does next, especially because he’s stated publicly that he intends to spend this next phase of his career focused on financial innovation broadly, but crypto and DeFi specifically. One question is: will he go as all in as Christopher Giancarlo? Christopher Giancarlo is a former CFTC chair, and he is all up in this business. He’s the co-founder of the Digital Dollar Project, which is a joint venture with Accenture to advocate for a U.S. CBDC. And interestingly, his argument is that CBDCs are coming and that the U.S. Constitution actually has certain privacy-preserving provisions that make a U.S. CBDC the world’s last best hope, to paraphrase.

Next, he has worked with companies in the crypto space, although that hasn’t always worked out. He joined the board of BlockFi but left just four months later around the swirling controversy with securities regulators about its interest account product. Now, he has said publicly that that’s not what it was about, that it was just about timing and that he’ll continue to advise them around those issues. But the timing does seem pretty coincidental. Then, just this week, however, Giancarlo also announced that he’s writing a book called “Crypto Dad: The Fight for the Future of Money.” That name, of course, references his nickname in the crypto space. Here’s the dust jacket: Crypto Dad tells the story of Giancarlo’s oversight of the world’s first regulated market for bitcoin derivatives, an action-adventure domestic political followed and engendered some global derision. Yet by braving the political risk of green-lighting the debut of bitcoin futures, the CFTC provided regulatory certainty essential for today’s burgeoning crypto industry. That book comes out at the end of October.

On top of all of this, he’s just generally a vocal advocate for the industry. Perhaps unsurprisingly, he doesn’t particularly hold with the SEC’s view of their recent Coinbase tussle. He said: “The chairs of regulatory agencies have a fair amount of discretion in terms of applying rule sets. It’s important for this new innovation that we don’t apply 90 year old statutes, which is effectively what we have. Ultimately, it will be the court that will have to determine jurisdiction and apply the securities laws to these asset classes. And I’m optimistic that Congress steps in. Congress in the last few months has really recognized crypto and has woken up to this technology and its power and potential.” I think this last part is interesting. First, it is notable that the CFTC is now down to two commissioners of the total up to five that they can have. And the Biden administration doesn’t particularly seem in a rush to fill those seats. This is problematic because the CFTC has more experience and seemingly more interest in regulating crypto in a pro-innovation way than does the SEC, which is trying to grab all that power for themselves, or at least themselves plus their friends over at the Treasury Department.  I also think his point about Congress is important. One of the very frustrating things about the whole infrastructure bill process was how much the job of the Senate and Congress was being outsourced to the Treasury Department, a group of officials who, whatever their individual merits, were not elected by the American people.

Anyways, just to wrap up this question of why former U.S. regulators are moving into crypto. I think that there’s two ways to look at it. One is to be cynical, to say that they see a honeypot, a new financial opportunity. And certainly there’s some aspect of that we’re all here in part because “number go up.” The positive view, however, the one that I ascribe to in this case, is that these former financial regulators, after reviewing every part of the financial industry, every macro change every technology innovation, have chosen to view crypto, this little space that we’re in as the most interesting, most fascinating and most deserving of their time part of the entire space. If that’s the case, I think it reflects the bright future that I see for this industry that clearly others see as well. Anyways guys, I hope you’re heading into a great weekend. I appreciate you listening as always, until tomorrow. Be safe and take care of each other, peace!