Jan 24, 2023

Rep. Warren Davidson (R-Ohio), Vice Chair of the Financial Services Subcommittee on Digital Assets, Financial Technology and Inclusion, discusses the outlook for crypto regulation in the wake of Genesis' crypto lending businesses filing for bankruptcy.

Video transcript

The state of crypto is presented by Tron connecting the world to the power of Cryptocurrency. Well, you guessed it, House of House Republicans are making new moves to regulate crypto on Capitol Hill. And last week they announced the creation of a new subcommittee on digital assets, financial technology. And you guessed it again inclusion joining us to discuss this is Ohio Congressman, Warren Davidson. Welcome back, Congressman. Yeah, good to be with you. Thank you for covering this. Well, this is what we do and we're gonna dive straight into it. You are the vice chair of this first of its kind subcommittee. Uh But we got to ask you this and we've been discussing, you know, how do we go ahead from the last time you came on? And you spoke about the fact that there's a likelihood of staple coin coming, staple coin regulation coming. But this is a new congress and what is going to be the biggest policy priority for this, for this new subcommittee? Keeping in mind that FTX has just changed the entire equation. Yeah. Um you know, French Hill is the chairman. So as vice chair, my main role is to support him. And so I'll, I'll let him speak for definitively what his priorities are. But the landscape in Congress, we made quite a lot of progress on the staple coin bill. We came a little short, uh, in terms of the kind of clarity that we needed from the text, we had directional clarity. And when you look at the, you know, setting aside tether the next largest, uh, stable coins, the US dollar coin, Gemini Pao, things like that. They're regulated as New York Trusts, they have disclosure requirements. They're audited financials, uh, they're overseen by New York state regulators. Uh, and the idea that we couldn't trust those in other states, uh, it isn't really plausible. So we believe that that kind of regulatory regime, uh, could provide a path and what are the characteristics of that, that you could, um, you know, make concrete and so you could create a clear, uh, federally regulated, uh, stable coin so that you'd have clarity throughout the market. Um, this would cover not just, uh, relationships with, um, the payments end of things but also with banks and others. So you could be clear that this is an asset and it's valued appropriately as in a 1 to 1, um, you know, valuation. So, uh, that's, that's probably the crawl phase. I think the walk phase is getting some clarity so that you, you know, know what the securities and exchange commission is gonna do. They've, they've engaged in regulation by enforcement and that's frustrated markets quite a lot. So just to follow up on that and thank you for that explanation. You know, right now we have this FTX implosion. You have a lot of people in the US government and Congress being like we need to do something, we need to do something to prevent this. I think it's not an understatement to say that the rest of the world is also looking at the US to be like, what is the US going to do? So just kind of like looking at the context that we're in. What do you think is the most urgent priority for regulation? I mean, is it still stable coins because stable coins, you know, it's a, it's a different problem, right? I mean, if you sort of had a magic wand here, I mean, what do you think, given all the drama that we've seen in crypto, what should Congress be focusing on now? Um to sort of prevent this next thing from happening? I think one of the reasons why stable coin is important, um is it's something that's easy for members of Congress to grasp. It's very concrete and tangible. It either holds the dollar to dollar match or it doesn't, it's easy to audit those things and have a clear standard. And if you look at how it's related to ftxftx kind of imploded when uh when it was shown that their uh stable coin wasn't a stable coin at all. F TT was backed by nothing except empty promises of someone that appears to have committed a pretty big fraud. So, um, you know, this, this would be, you know, you know, a hook to say this, this couldn't have even happened in a lot of cases, billions of dollars in value uh with their F TT token. Um, so that, that appears to have been a fraudulently issued, um, quote stable coin, uh never intended to be stable at all. Um And so when you look next, well, what is the security? Uh and you know, Gary Ginzler will say, oh, it's so clear, we have the Howie test. It's not clear at all, which is why he says come in and talk to us and company after company comes in and talks to him including FTX and they either don't detect things like they didn't on Celsius and who knows how many others uh or they do things that um just endless discovery for years in some cases and they never get around to definitively saying nope, this is a security or hey, here's a no action letter, only three, no action letters. So uh it's really driving capital outside of our markets. We have to make a bright line test that everyone knows, not just um the the innovators and investors, but the regulators themselves if it's a security or not, right? But I think the, the other issue here is that FTX global were, I mean, there was FTX US but FTX Global was outside of the United States. Right. So would any of this have prevented that from happening? Because that's a slightly separate issue. I think it would have uh and fundamentally if um we had better markets in the United States, look, we have like 5% of the world's population. We have rough, almost 25% of the world's GDP, but we have roughly 50% of the world's invested capital. Our markets are incredibly robust when we look at crypto, you know, 75 plus percent of the liquidity for crypto is offshore. Uh And that's because they're looking for that provide a clear law. Uh The United States doesn't do that. And normally when you have problems, Congress is ready uh to, to provide some sort of law, even if it's a bad one. In this case, Congress, we've had a uh really a nonpartisan, not even bipartisan. There's no real partisanship on whether um you know, we should do some sort of light touch regulation in this space. Like was done for the internet. Uh The internet was going to be a thing somewhere and we made it a thing in the United States because we, you know, protected it in a sense of you could have clarity. If you do these things, then you're within bounds and if you don't, well then OK, you might have problems, everyone stayed within bounds and it flourished in the United States and I think investors would be much better protected if we did the same, uh, for fintech in the United States. So, Representative Davidson, we have a waiting in the Wings Hester purse. She's an sec commissioner, you know her. Well, um, and the question we have here is this, who's going to regulate the spot markets? This has been driving everybody crazy now forever. Is it going to be the SEC? Is it gonna be the CFTC? Is it gonna be a, uh, something else? Where is it? You know, who exactly is going to do that job? Because I think that's one thing that the crypto markets has, uh, uh, have been like pulling their hair out at. Yeah. And I think they're frustrated because it's so easy. How is this? Look, we have a gold ETF. How's that regulated when you buy and sell gold? Gold is a commodity? But when you set up an ETF, it's a security. So it's regulated by the SEC, uh, for the ETF. But the people that are on the back end are buying and selling gold that's regulated by the commodity futures trading commission. CFTC. So how is it that Bitcoin? The only thing that pretty much universally everyone agrees is not a security. How is it hard to get a spot? ETF for Bitcoin? Uh So it would be crazy to think that Congress literally needs to pass a law to create a Bitcoin ETF, uh, but there's been no action forever out of the SEC. Uh, and, and it's really, how is it different than any, any other spot ETF, uh, for commodities? I mean, oil is, is overseen, uh, it's the largest commodity, it's not, uh, overseen by the Federal Reserve or the SEC yet there's spot ETF. S for it. So, so will Congress actually pass a rule, uh, pass a law that would specifically lay out who is, who is in charge of the spot markets? They just, just that we don't have any, any confusion is driving everyone nuts. Yeah, we may have to. Uh but it, I don't understand how it's not already clear. Uh When it's a, when, when Bitcoin in particular is a, you know, a commodity and when you look at, when you look at other things, that's where you would be clear if it's a commodity or not, let's say the, clearly, it's a little bit of a debate whether it is or not. Most people say it's a commodity. Uh If we passed a bright line test, then it would be crystal clear. Uh ripple XRP, one of the most contentious cases, obviously, investors and holders of XRP believe that it's um not a security. Uh but the S ECs filed uh really frozen it for us investors um and crippled it really harming investors instead of protecting investors if in fact, it is not a security. Um And so, you know, this is where if it's not a security and it's, then it should be regulated in terms of buying and selling the actual asset. But then when you structure it as an ETF, um then it, then of course, the SEC oversees the E the ETF, just like, you know, a gold or a royal ETF II. I get that it seems very, fairly clear, but it doesn't seem clear to the regulators. So I'm wondering here, you have a phone, you have, I assume a direct line to, to Kevin mccarthy. And, and, and you have a, you have a, you have a majority here in Congress, a slim majority to be sure. But nonetheless, you have Democrats who would sign on to it. When can we get a piece of legislation that clearly state lays out what is a security when it comes to crypto, what should be regulated by the SEC and what should be regulated by the CF DC? When can we see legislation like this? Well, I wouldn't be, there is legislation like that. It just hasn't moved Darren Soto and I introduced it at the end of 2018. So, uh, we've been working to get the Token Taxonomy Act passed ever since. Uh, and it is not partisan, it's equally balanced with Republicans and Democrats. Um, but look, where does this line break? Um, fundamentally, there are people that hate crypto. I mean, Elizabeth Warren in the Senate banking committee has driven the policy over there. Uh Sheri Brown basically just does whatever Elizabeth Warren tells him to. Uh and she's been hostile to the entire space. So the question is, can we craft a policy that can get through the house and get a fair hearing in the Senate? And if, if it's really an effective policy, will the Senate move it? Because it really does do what the SEC is already supposed to do, which is protect, invest, uh they're protecting investors. Uh version of it is to kill the market. Uh That's not protecting investors. This market could be great. Uh And it could be much more robust if we provided some nominal level of legal clarity. Uh And, and so Congress really does need to pass uh pass that I hope it starts quickly with stable coin regulation, but I'm, I'm sure we'll have some really effective hearings uh in short order. Um So just quickly, just to circle back on something we discussed earlier. Um I don't think stable coin regulation would specifically address a future F TT because F TT was not necessarily discussed as a stable coin. It was more sort of the native currency of FTX. But anyway, my, my, my final question is just following up on what you just said about people hating crypto and Elizabeth Warren. Um What is the mood right now? I mean, you're sort of in Congress, I mean, you kind of have the real bird's eye view is, is it true that the sentiment towards crypto is becoming really more negative inside Congress? I mean, that's the impression that I think a lot of people have. But do you think that's accurate, do you think that more people are actually turning against crypto or are more likely to advocate for quote unquote crypto, unfriendly regulation? Yeah. I think there's a real danger of that. Um, and, and things that people don't understand, they tend to fear. Uh and a lot of people don't understand it. And fundamentally, if you look at the top 10 issues in a congressional district, I don't think there's a single congressional district. This would be a top 10 issue in. But when you look at for our capital markets and for, you know, innovation and the broad potential this offers, I think it's a top five issue. I really think it's a fundamental importance to our capital formation in the United States. And it kind of gets at the heart of, you know, what is the future of capitalism? Is it uh continue to be kind of, you know, the accredited investor, you know, deal flow for the donor class protected uh for, for the elites, swift, just banned um you know, transfers of of under $100,000. This is simply targeting retail investors. Uh Well, supposedly the biggest, most so investors in the world just got scammed and burnt by FTX. So why are you gonna block the small retail investors uh but somehow permit it for the biggest investors. Uh It really smells bad. It looks like an effort, a coordinated effort to kind of harm retail investors and protect the most in big, you know, the most established incumbents ie the biggest banks who would be disrupted by a permission less peer to peer payment system like Bitcoin just zooming out a little bit. Keeping in mind the fact that the G 20 finance track is actually meeting in India. Uh several conversations are ongoing. And, and you actually in an interview recently, you spoke about China and you spoke about how China has been using its soft power. And part of that soft power and trade tactics is its, you know, aggressive approach on CV DC. It's digital yuan. Uh On the other hand, you know, experts also very clearly said that the CBD C of China, it could actually lead to de dollarization. But you've at the same time prioritized table coins over something like A US CBD C which would once again, you know, concede that, that that ground to China, which it anyway has taken the lead on. So like how does that square off that cautious approach on CBD C by the US? Yeah, why would we want to adopt China's version of money? I mean, no one wants Chinese money. Uh why? Because they're a totalitarian regime controlled by the Chinese Communist Party, even the wealthy people in China want to get their R and B out of China, they want something to protect themselves and their financial future that isn't subject to the whims of Xi Jinping. Uh So, you know, why would we feel, oh gosh, if we don't adopt Xi Jinping's version of money, we're doomed. But over 100 countries around the world are looking at central bank digital currencies and they're not looking at uh decentralized distributed ledger technology like Bitcoin that protects permission was peer to peer transactions. Uh freedom money. They're looking at dystopian Orwellian future money like the Chinese Communist Party's creepy surveillance tool. Uh So we're, we're starting to work on a Privacy Protection Act uh Payment Privacy Act that would protect the privacy so that when you pay for something, uh the data of what exactly you paid for isn't transmitted into the payment system. Um because that is the heart of what the Chinese Communist Party wants to do. They want to link uh payments to social credit and look in the United States. I mean, Maxine Waters had hearings when she was chairwoman of the House Financial Services Committee on the creepy surveillance state version of that China is working on and she had subsequent hearings on nationalizing the credit ratings agencies. Like why would you do that? I mean every place that you see this depicted in an Orwellian future, it's shown as evil, like why would the world be working on this tool? Uh And I think America has to not only stay away from it, we have to work to stop it from spreading. So I think it's really truly a threat to the values and principles of western civilization on a slightly related topic. Uh, of course, Kevin mccarthy President about debt ceiling limit. Uh, what do you think? Do you think that there'll be a, there'll be an extension of it, there'll be an increase in the debt ceiling. Uh, do you think that there'll be cuts along the way or do you think that ultimately Congress will give the president what he wants and, and raise the debt ceiling without uh without any cuts? Oh, I mean, look, the debt ceiling has to be raised. We're not gonna default on, on our debt, so we're going to pay, we're gonna pay our bills. Um But the idea that you don't even need a debt ceiling or the idea that you should just engage in unlimited uh borrowing is foolish. I mean, it's akin to a cancer patient saying, you know, I'm just gonna pretend that I don't have cancer. I mean, dangerous foolish, horrible approach. Uh We know we have a problem with, with our debt and the whole point should be just let's agree on a number. Uh I, I like the idea of a debt to GDP ratio. Uh but the trouble is we're already over 100 and 20% debt to GDP. I mean, this is territory where lots of countries uh end up going into monetary default and you know, the United States is the global reserve currency. I mean, this is a real problem, not just for the United States but for the world. And uh it seems like a lot of countries want to embrace Chinese version of the future of money and that's where they're all related. We have to avoid that if we do have a future of money that's different than the current one. It can't be this Orwellian, you know, creepy surveillance state money China is working on. Yeah, I guess the question was more about just trying to understand why is the US not, you know, moving ahead with countering China. Uh it's, it's, it's been slow, the stable con regulation has still not come up. Uh subcommittees are being formed right now. Uh It's a bit slow and just keeping in mind, you know, on the day, the subcommittee was actually announced by, by the Hill, the SEC filed a law alleging Gemini and Genesis global capital sold unregistered securities. And you criticize that move uh in this tweet writing, if Gary against was serious about helping investors, he would stop regulation by selective enforcement, something that's been said quite often. But we should also note at this point in time that BC G is the parent company of Genesis and Coin as though like what should he have done that he had not done against that? What should he be doing then is, here's the most basic example, uh, you know, Gusler and crew at the SEC entered into a settlement agreement with, uh, Kim Kardashian because she allegedly, uh, promoted, uh, unregistered securities. Well, what did she promote? She promoted Ethereum Max. Well, they're, they, they reach, they fined her, they had her pay what, a million and a half dollars. But Ethereum Max is still trading today. They're not treating it as if it's a security, you know, and if Ethereum Max is a security, why, why engage in a, an enforcement action against Ethereum Max versus providing a clear bright line rule going through rulemaking and saying if it looks like this and acts like this, then it is a security and we are first moving on this one, but we're moving on everything that looks like this. Um And instead you've got people that are engaging in overt pumping dume scams and getting away with it over the years because the sec is asleep at the wheel or in a worst case scenario, coconspirators uh to launching things that they themselves say are unregistered securities. Uh So some seem to get a free pass and others seem to get their business models killed. What's the rhyme or reason behind it? And a lot of people say, you know what I got a business to run, I'm just launching it outside the United States just, you know, before we wrap up, are you, are you do do you think it's a bit harsh to say that they, they're asleep at the wheel. Yes. I think it's harsh and it's meant to be, uh you know, uh and they, they have not look at the results. I mean, whether you're Elizabeth Warren and want to kill crypto or you're Warren Davidson and think it offers a great promise for the future. If we actually do something productive in legislation about it, no one's happy with the job the Se C's done. Uh So I it's Gary Ginzler job to lead that organization. And you really have to question, is Gary Gins up to the task? And if he is, then is it structural with the SEC? Because the results I think are self evident, they are not getting the job done.

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