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White House Anti-Crypto Stance Threatens Bipartisan Coalition; US CBDC In The Mix

White House goes anti-crypto

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White House throws 3-pitch crypto strikeout

STRIKE 1 – On Friday, with a tip of the cap to President Biden’s digital assets Executive Order last March, the White House released, “The Administration’s Roadmap to Mitigate Cryptocurrencies’ Risks.” The emphasis of the report is entirely on “risks.” Also – note the use of “cryptocurrencies’ risks” rather than “digital assets risks” in the title. Is the White House cutting to the chase on what it thinks about the broader context of digital assets and blockchain technology? Co-author and White House National Economic Council Director Brian Deese warned Congress later in the day, “We’re ready to work w/ Congress to address regulatory gaps, but it would be a grave mistake to reverse course and deepen ties btw crypto and the financial system.”

STRIKE 2 – At the same time, the Federal Reserve Board (FRB) announced that it was not letting digital assets bank and Wyoming-based Custodia Bank become a member of the Federal Reserve System. “The firm’s novel business model and proposed focus on crypto-assets presented significant safety and soundness risks…” – no crypto allowed in the U.S. banking system in other words. Expressing “surprise and disappoointment,” Custodia Bank’s founder and CEO Caitlin Long said Custodia’s master account application at the Federal Reserve Board of Kansas City is still pending. Perhaps -but it’s also mired in the courts. This is the front lines of TradFi vs DeFi.

STRIKE 3 – Finally, at the same time as its Custodia bank announcement, The FRB issued a 14-page policy statement warning banks about their involvement in crypto on the grounds of “safety and soundness.” According to a separate press release, “The Board has not identified any authority permitting national banks to hold most crypto-assets, including bitcoin and ether, as principal in any amount, and there is no federal statute or rule expressly permitting state banks to hold crypto-assets as principal. Therefore, the Board would presumptively prohibit state member banks from engaging in such activity under section 9(13) of the Act.” In a four-page memo to its Board of Governors, The Fed boils the policy down including the intent to rein in state banks interested in crypto… like those in Wyoming?

will pro-crypto Dems desert?

With a Democratic White House appearing to fight against efforts to advance digital assets legislation, where does Friday’s “3-pitch strikeout” leave pro-crypto Democrats especially as the next Presidential election approaches in 2024? Some Democratic political strategists around the President may believe crypto and digital assets as something to use against Republicans in ’24.

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Rep. French Hill Discusses Digital Assets Subcommittee Agenda

Rep. French Hill

This morning, Rep. French Hill, who is Chair of the new Subcommittee on Digital Assets, Financial Technology and Inclusion under the House Financial Services Committee, appeared on CNBC in an interview with anchor Joe Kernen.

Highlights include his interest in nurturing bipartisan support for blockchain legislation as well as coming privacy and stablecoin bills. And he also suggested that his new subcommittee will be working with the Agriculture committees in the House and Senate on upcoming bills but did not specify which. See the interview here.

Transcript below:

JOE KERNEN: [On crypto] – people go into both corners depending on which side of the aisle they’re on. Congressman, what what does that come from? Why do you need convincing of one side or the other if you want to do this? The Democrats aren’t going to want to do it. I know I can see it coming.

REP. FRENCH HILL: Joe, good morning. It’s good to be with you.

I think there’s an opportunity for bipartisan work here on creating a regulatory framework around digital assets. I think for two reasons. One, you’re right. There are some Democrats that think anything associated with blockchain, or cryptocurrency is just money laundering in a way to have bad behavior.

On the other hand, there’s some Republicans that think the future is decentralized finance and that digital assets are critical.

I think we bring them together because blockchain is an important innovation area. We want that technology to be done here in the United States. We want a regulatory framework that is transparent for developers, investors, and potential consumers as people try to prove a use case.

And finally, we want to make sure that people have a full transparency of that. And so I think that will bring Democrats and Republicans together for both law enforcement reasons, if that’s what their top issue is, or for innovation and financial technology reasons.

JOE KERNEN: Congressman, do you think we need to follow the money? Do we need to see who who gets disintermediated [and] whether they have big offices on K Street and don’t want this to happen? I won’t mention any names, but obviously there’s a lot of industries that that probably are loath to think of a future with decentralized finance.

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DeFi and DAOs In Spotlight Of Latest CFTC Enforcement Action

Enforcement

An alleged fraudster wreaked havoc on a decentralized asset exchange called Mango Markets according to the latest enforcement action by the Commodity Futures and Trading Commission (CFTC).

In a statement last night, the regulatory agency announced the action against a trader, Avraham Eisenberg:

“This is the CFTC’s first enforcement action for a fraudulent or manipulative scheme involving trading on a supposed decentralized digital asset platform, and its first involving a scheme that is sometimes called ‘oracle manipulation.'”

Regarding “oracle manipulation,” the accused used a data stream (oracle) connected to the price of the Mango token to favorably affect the price of whatever he was trading – in this case, a derivative known as a swap.

The fraud outlined by the CFTC amounts to a classic “pump and dump” where the price goes up just long enough to let the pumper sell his shares, tokens and/or derivatives (this case).

In the space of 30 minutes last October, Mr. Eisenberg reportedly got away with $47 million in digital assets from the Mango Markets platform says the agency.

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FTX Implosion May Be The Catalyst for Fast-Tracking Legislation

Yesterday, Binance, the largest global cryptocurrency exchange, acquired FTX’s global exchange after its founder and CEO Sam Bankman-Fried appeared to have knowingly parked unbacked, illiquid assets on a sister company’s balance sheet – the stuff regulators warn about – which brought FTX to near-insolvency.

As a result, Bankman-Fried did the only thing he could which was to sell FTX to his competitor.

It’s not a good look for crypto and its legislative champions. On the other hand, if you’re rooting for new regulation, this may be what forces Congress’ hand. Guardrails are needed ASAP if consumers are going to be protected and the industry is going to flourish.

The damage

Is the impact from this bigger than the Terra Luna stablecoin debacle in the Spring? Probably.

First, let’s review the “soft” impact…

Sam Bankman-Fried was arguably the most popular industry figure in Washington D.C., appearing multiple times in front of Congressional committees in spite of his global company’s Bahamian address. Now, his name and reputation have taken a devastating hit affecting relationships with the CFTC and Congress especially as it relates to the feedback he was providing on crypto derivatives changes and the Stabenow-Boozman Digital Consumer Commodity Protection Act (DCCPA) coming out of the Senate Ag committee.

Undoubtedly, SBF’s (as Sam Bankman-Fried is colloquially known) actions were damaging to the crypto industry itself which was already dealing with multiple scandals,  hacks and “rugs” making DC power players wonder if crypto is a positive, world-changing innovation or just a fleeting ponzi scheme that allows SEC Chair Gary Gensler to say, “I told you so.”

Moreover, the financial damage wrought by the enormous blunder is still unknown. Are all customer funds safe? Maybe. Seems so. What about FTX’s billions in funds? Likely not. How about FTX’s investors? They’re definitely holding the bag.

One important qualifier in this mess is that FTX.us (the carve out within FTX which deals with US business) will remain independent from the Binance deal meaning Bankman-Fried is still in the game, so to speak – at least for now – until another shoe drops.

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Jamie Dimon Likes Blockchain, His Stablecoin – Not Crypto

JP Morgan CEO Jamie Dimon

This afternoon at a session of the Institute for International Finance (IIF) Annual Meeting in Washington, D.C., JP Morgan CEO Jamie Dimon pleased the crowd with his increasingly legendary response to the efficacy of cryptocurrency.

He wasn’t the only one talking crypto at the conference. The IIF brings together the top leaders in traditional finance to help coordinate a global approach in financial policies. Crypto and digital assets was among the meeting’s hottest topics.

The IIF’s Tim Adams teed up Dimon asking: “You’ve had strong opinions in the past on digital currencies, speculative currencies, stablecoins… still have strong views?”

Dimon, clearly reveling in the moment, “Yeah. [audience laughter] But, I’ll clarify them.”

He explained that “blockchain technology is real” and that JP Morgan deploys it in many places through their Onyx coin system. Using distributed ledger technology, it’s a business-to-business system that enables a stablecoin backed by US dollar deposits at JP Morgan which purports to efficiently clear assets between banks.

Dimon said, “My issue is …. what you guys call cryptocurrency – which I call a crypto token – that doesn’t do anything.”

Invoking Voltaire (not a type-o), he said he respected people’s right to do what they want,  but Dimon saw crypto as a “decentralized Ponzi’ scheme hyped around the world and responsible for “fraud, stealing, sex trafficking, drugs, ransomware, tax avoidance – it’s extraordinary.”

He continued, “There’s no real use for it other than speculation, and it’s also dirty and expensive and volatile.”

Finally, he equated crypto to Beanie Babies.

The bright side

For crypto supporters, the fact the JP Morgan CEO never made a tulip bulb reference could be seen as a limited win.

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What ‘Crypto Winter’? NFT Community Unites at NFT.NYC

NFT.NYC

1,500 speakers, 15,000 attendees and an agenda 56 pages long (see the PDF) – NFT.NYC was huge this past week and included a badge pick-up line stretching halfway around a Manhattan city block for much of the day on Monday.

There were no government types on stage, but the palpable momentum exhibited on and off-stage spoke to the importance of the NFT space to 20- and 30-somethings across the world – especially the United States – given the anecdotally-observed demographics of the show.

More observations about NFT.NYC:

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The Bi-Partisan Slay, SEC and CFTC Need Help, DC Versus Davos

DC Blockchain Summit

It was a remarkable week for the blockchain technology community last week: there were conferences where blockchain was top of mind, congressional and regulatory superstars were involved and engaged, and even some humble pie was served.

Let’s review.

The Bi-Partisan Slay

In a country starved for something-we-can-all-agree-upon, along comes blockchain technology guided by its community and successful in its appeal across gender, race and both sides of the U.S. Congressional aisle. In the process, and appearing in one conference, Congressmen Soto (D, FL) and Emmer (R, MN), Senators Lummis (R, WY) and Gillibrand (D, NY), and Senators Daines (R, MT) and Booker (D, NJ) have dashed to the blockchain rooftop like Santa’s strongest reindeer.

Slay…

Can you imagine this in 2017? How about 2020? Me neither. And yet it’s happening in 2022. The bi-partisan/non-partisan rhetoric achieved new heights at the DC Blockchain Summit with Senator Cory Booker saying emphatically that he sees an opportunity to close the wealth gap in minority communities with the growing blockchain technology industry.

This bipartisan, non-partisan thing is the secret sauce for the blockchain community.

DC vs Davos

Blockchain dollars flowed into Davos, Switzerland, and the World Economic Forum for its delayed annual gathering last week. Given the event’s unspoken positioning as a watering hole for global elites – Davos gives attending companies and organizations a branding element that says they’re global players, too.

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