Episode Transcript
Speaker 1 00:00:14 Hello and welcome back to the Tron policy Report. I'm your host, Andrew Hemingway. On this podcast, we seek to provide to you insights and knowledge that you will not find anywhere else. We do this by interviewing leading authorities on the blockchain and regulation from all over the world. Please make sure to subscribe to the Tron policy report and be sure to join us every other Wednesday for a new episode.
Speaker 1 00:00:55 And welcome back. We are excited to have as our guest this week Nick Anthony. He is a policy analyst and the entity that he works for is very simply known as Cato Institute. But Nick works for a special section of Cato Institute, the prestigious institution there found in Washington, founded upon libertarian principles and values. They have been at Beacon for liberty and freedom for many years, decades even. And Nick holds, of course, a special place there in, in fighting for, and advocating for, I guess this may be a kinder word, but advocating for financial, uh, freedom in policy. Let me see if I can get the name of the group right, Nick? It is the Cato Center for Monetary and Financial Alternatives. Yes. Awesome. All right. And Nick, so mix a policy analyst there. You have got to make sure you mark his name. I have him in in Google, marked so that whenever he publishes it comes up, it's always worth reading.
Speaker 1 00:01:53 There's a just a ton of information, insights. You are definitely going to want to bookmark this guy's name and check out what he is writing. It's very, I think, very important for the entire industry. So Nick, I am privileged. We're honored to have you on and looking forward to the conversation. Thank you so much. I'm so happy to be here and I really appreciate the kind introduction. It's definitely been a, a busy time in this space, so I'm just happy to be able to contribute and distill down some of the noise and hopefully lend a hand folks understanding of what's happening in Congress these days. Absolutely. There is, without a doubt, a lot of noise. There's, there's, uh, seems to be more and more. And that sort of leads me into kind of what I've been thinking about, which is you have a, you have your finger on the pulse, if you will, I think especially in the us but because of the nature of crypto globally, what are, what is something that is just right now so present that perhaps I, we use the term keeps you up at night, but what is something that that is on the front of your mind that you're just kind of watching and perhaps fearing a little bit?
Speaker 1 00:03:00 I think right now, it's a little funny to phrase it this way, but I think right now what keeps me up at night is really something from the 1970s alluding to of course, the Bank Secrecy Act and the financial surveillance regime that has been grown over the past 50 years or so. Yeah. And when we think about cryptocurrencies and getting away from the banking system, what really keeps me up is this idea of trying to wrangle them and fence them in, or at least policy makers trying to fence them in and bring them into the Bank Secrecy Act. Just the other week we saw Senator Elizabeth Warren from Massachusetts trying to use a bill to essentially rope cryptocurrencies in, she touted decentralization as nothing more than a giant loophole. And when I hear language like that and I hear the technology misunderstood and I hear even the US Constitution misunderstood it, it really worries me about what our future's gonna look like.
Speaker 1 00:04:09 And even not just the 10 years from now, even just year from now or next six months, if something like that's on the table, then what else is just over the horizon? Yeah, no, I definitely get that. Now, you used one term there that I'm not totally familiar with, constitution <laugh>, is that Oh, a very uncommon term. <laugh>. Yeah. Yeah. I was like, wow. Wow. That's of lasts from the past. No, absolutely. And I think even the hearings of the last week in the banking committee where of course Senator Warren's making these comments spearheaded by Chairman Brown, and I mean his occasion essentially of crypto as all scams and all to be outside the system where, what is the, what is the current temperature of crypto in Congress and is there a split between the House and Senate from a temperature perspective right now, I think as, as pretty much everyone will likely recognize, it's definitely not looking good in most respects because of the fallout from ftm.
Speaker 1 00:05:15 It's already bad to be in a down market or bear market just because for policymakers who are otherwise critical, it's a good, it's a good opportunity for them to, to step in because if markets are down, there's less pushback, especially if people are losing money, there's less pushback, they may even rally support. And that has really been coupled with how off guard the FTX situation caught everyone. People were accepting donations, people were regularly doing photo ops. And then to find out that this was one of the biggest issues in the space. Unfortunately, there's a certain risk of an overreaction, almost to say face from what happened beforehand. And it seems like in the house, there's still the same split that there was before FTX fallout. But in the Senate now we're seeing more of Republicans are being more critical than they were previously saying that there needs to be some accountability and some sort of check on what's going on here.
Speaker 1 00:06:28 And you're seeing them kind of inch closer in that respect to the same page where longstanding Democrat critics have been not quite as, they're still not supporting or endorsing the methods of the S e C, but we're seeing more criticals across the board, right. For what seems to me to be like a couple of years, like to your point, when we were going through the big ramp up that last kind of like ramp up of crypto from a pricing trading perspective, Washington seemed to be extremely quiet. Sea movements, extremely quiet, cftc, extremely quiet. As soon as there was a slightest downturn, suddenly every regulator, every politician in the country decided, oh, crypto's their issue. And they're going to, they're going to seek to, to villainize it at all costs, which obviously on its face is hypocritical and parasitical, but that's standard operating procedure as it appears.
Speaker 1 00:07:25 So I, I guess what I'm thinking is like we have now agencies trying to, what I see as marking their territory or trying to use, uh, enforcement and like actions to try to say, this is our area. You have the s e c, the cftc, you have the Fed banking, you have all these various committees and regulatory agencies. Now you have all these activities, and yet there seems to be a real deficiency of activity from Congress. And could you just give us a sense, how is policy supposed to be formed in the United States and is crypto following that path or are we on a, an uncharted territory? This is one of the really great questions that's going on right now, and it pulls from so many different fields from political science to public choice economics, and even just sociology in general. One of the challenges right now is that you want policy makers to be fast, but the faster they are, the more mistakes that tend to be made.
Speaker 1 00:08:34 So you want them to take their time and be more diligent. Yet if they take too long, then we start to lag behind and then questions come up that need answers. And so long as we continue to lag, you have agencies that exercise their relative independence to start stepping in for enforcement or even regulation because it tends to be a little bit of a faster process. And because they don't have the same level of accountability, unelected officials as we often refer to them, can move a little faster. They can break things without the same concern, whereas the way Congress wants to look at it is getting it right the first time and never having to change it. A really good example of this, of moving too fast and having it locked in as the quote unquote final answer came with the infrastructure act. And when that had the crypto provisions that caught everyone's attention and brought the cryptocurrency industry really into DC or at least made them realize they had to be here, that was an overnight provision that was slipped in.
Speaker 1 00:09:48 And even though they're wide support for the fact that it's blatantly wrong and arguably unconstitutional, we've now been two years since then without any Right. There's been proposals on the table to fix it, but there hasn't been any substantive fix or any real push for that fix and supposed to be this almost scholarly, diligent process. But the realities of the world make it very messy in that you can quickly go too fast and get it wrong, or you can wait for the perfect product and never get it right. Yeah, purely because you never do anything. Yeah, no, the but the, just walk me through like the process though, right? Should these things start in Congress or should they start in the marketplace? Should they start in the regulatory agency? Where is it that someone says, we need a rule for this or law for this, and who should be the one making that?
Speaker 1 00:10:48 I think the clearest place is really when you get to the point of there being some sort of market failure taking place. So I think rules should develop within private market actors, and they do develop either unofficially or officially, it may not be a written code of conduct, but we do have ways of navigating ourselves in the market just like we have norms for conversation, polite society and the like. Now, when you get to the point where there are real market failures though, that's when you have a time, at least from a libertarian perspective, that it's justified to have Congress step in to introduce some sort of fix. So thinking about examples of fraud taking place or widespread externalities that can't be internalized costs that are spread across everyone even though they didn't consent to them. Those are times when you can have a law step in.
Speaker 1 00:11:48 And we do have laws on the books. This is something that I really gripe with and I, I know the folks at Coin Center regularly call this out as well. This idea that cryptocurrency is unregulated is just patently false, right? There are so many different laws that already apply. You don't have to say it verbatim in the title or else we'd be updating laws every single year to reflect every single individual in theft is still theft. And that's where like I, I think the industry as a whole, of course there are bad actors, right? The generally the industry has, I, I think for the previous 12 years, since its, since Bitcoin's inception 2010, has self-regulated. Now you, there are I think, critical view perspectives or views of how that has, but also think that if you strip out some of the hyperbolic headlines and understand that people also lose money investing in VCs and private equity and compare these things against the market losses of 2008, 2001, suddenly it, it doesn't seem like such a scam act as it's being called.
Speaker 1 00:13:00 But I feel like there's this call and I think what maybe Senator Lumis and Gilland were trying to do was more of a comprehensive approach. And to your point, I think that there's actually a way to simply add clarity and definition to existing law that could fit a large portion of the existing crypto marketplace. Is that accurate or is that a naive perspective? I think it could be both. I think it's accurate in that I agree with it that there are ways to like subtly make points clear. The only way that it might be naive is a problem that I have actually a lot when I talk about proposals for laws and for the congressional process. And it's that once you pass off your idea, and I see this with cbdc or Central Bank digital currencies a lot, once you pass the idea into Congress, there's not a firm promise or a firm guarantee that what you hand to an office that supports your idea will be the same thing that gets to committee, the same thing that'll be passed to the next committee and then to the Senate, right?
Speaker 1 00:14:07 And then back and forth again. And that's really, that's a huge shame in the process though because there are a lot of really simple things that could almost undoubtedly improve the American experience. And there are so many great ideas like what you're offering and not just in, in the cryptocurrency space, but really it a nationwide issue, right? It's just once it gets into the political process, it's becomes such a toss up. Yeah. And that's when you get it. It'd be perfect to have a bill that fixed one minute issue, but then it gets rolled into a comprehensive framework and then somebody doesn't agree with something that's on page. Yeah. 3002. Yeah. All you wanted was something on the third page. Yeah. But it doesn't go through because of that second objection. Yep. Yep. It all gets scrapped. So you mentioned cbdc. Where does, where do you come down and how do you, what appears to be the inevitability of a digital dollar?
Speaker 1 00:15:08 I think it's safe to say I'm very much against cbd CS across the board. I have a paper, I have a brief paper that just came out about a month ago, and then I have another longer version that's coming out hopefully in the near future. I don't quite have a date yet, but both of them really detail how I don't see the promises been offered by c BBC proponent as really being sound compared to the existing offerings we have things like, uh, it's often claimed that it'll improve payments. I see right now the realtime payments network fed now and even stablecoin as fulfilling that role. I see people say that it'll improve financial inclusion, but when we ask people why they're unbanked or underbanked, privacy and trust are two of the biggest issues, which during the financial surveillance regime in the United States, I don't see a CBD C helping someone who's concerned about privacy and then flipping the script to some of the costs.
Speaker 1 00:16:14 I really do worry about some of the risks, the same reason. So you could offer maybe some perfect example to Congress that would protect citizens rights across the board, but I'm not competent at all. That's what would make it to the other side, to the legislative reality. I really do worry that there are some proponents of CBD CS that overestimate that they'll instill or write into the white paper that there'll be ways to protect privacy or individual rights. And they don't really realize that once they hand it to Congress, who already is going to Yeah, get the bare minimum a M L compliance or anti-money laundering compliance. Yeah. It's just not gonna work out. Yeah. Those things just get washed out immediately. It's one of the, it's gonna be one of the negotiation pieces that's gonna fall away. Yeah. One of the first things was anonymity was taken off the board.
Speaker 1 00:17:13 Yeah, 100%. That was a pretty clear shot. And if you promise privacy and also promise any money laundering and know your customer compliance, you're not really promising privacy. It's a very fine line. Um, why, let me step back just for a second. Do you also have a philosophical aberration to central banks? I think it's safe to say yes, I'm highly critical of central banks. I don't know. I'll say I don't know the perfect to having a direct, I don't know the perfect answer to ending the Fed and replacing it in a single day. Yeah, <laugh>. But it's for that reason that I am so, so supportive of having alternative currencies and currency competition because in in two angles, I see that as being helpful in on one side, you could build out a system that becomes perfect alternative to a central bank. And if that doesn't work out, then if nothing else, you can build out a system that the central bank actually has to compete with.
Speaker 1 00:18:19 Because I think across the board, monopolies are almost always inefficient. And laggards a good example, just coming back off of faster payments that I mentioned, the US is lagging behind significantly on the front of faster payments. Aaron Klein at Brookings and George s here at Cato, Edward about that a lot. Yeah. And cryptocurrencies have really succeeded in that realm. Yeah. And offering realtime payments. It's almost unexcusable that a central bank with all of the funding, it has all of the experts, the PhDs, the engineers, and the like, couldn't offer something already. It's, it's really just unbelievable in many respects. Right. I, and I think that's an interesting perspective because one of the, one of the reasons why cryptocurrency exists and why there is a market for it and undeniable market for it beyond what they would frame as simply crypto scammers, the, there, there are real people using the crypto every day is because of the failures of the current financial system.
Speaker 1 00:19:19 And it is simply, it's the water test, right? It's like we're gonna move to someplace that's more efficient, that costs less, that is better suited for the transactions that I'm trying to do. And that's, that is why, that's why crypto even has a market and exists today. And what I think is interesting is the Fed and Congress really 10 years ago could have acted in a way that, that they wouldn't have to ban it, but that they could have said there are, there, there is a space for this. And used some of the innovation and started to integrate in innovation into it in a way that we wouldn't even, we literally wouldn't even be having this conversation. And that to me is that's the tragedy of the situation. I'm right there with you. It's, it's really been one of the frustrating points about CBD CS as well is that there are a lot of policy makers that see CBD C as perfect panacea for protecting the dollar.
Speaker 1 00:20:17 And there are just so many other things that could be improved with the dollar that will go so much for, I really pains me and play to their credit. While I am critical of also government at large, many offices on the hill that I've sat down with. When I break that down to them and explain the fundamentals of A C B D C and why the US has the world reserve currency status and what can actually be improvements that will help protect that status, most of them are pretty understanding. It's a little bit of an eye-opening moment. Definitely an opportunity to push forward. It's just, it's a bit of a heavy lift at the moment. Yeah. Especially when you have something as controversial, if that's the right word. As China leading the path on cbd cs, a lot of folks as we've seen time and time again, have it in their head that the best way to compete with China is to be like China.
Speaker 1 00:21:17 Unfortunately, that's proven to be a very sticky thought pattern. I just do not agree with that at all, Nick, that was the kindest way you could have ever put that by calling that that thinking sticky. That was genuinely very generous, very Dennis wanted to call that out. I try to be kind. I'm so critical that I try to balance it out a little bit on that. You did. I was just thinking of like cinnamon buttons basically when you were talking about that. It's like good childhood memories for flooding my mind, but is defi. So I have this vision, right, that Defi sits so far outside of the current system that there isn't the legal, financial and really governing framework to be able to accept or find a place for something that is truly decentralized. But that doesn't mean that it won't exist. So do you see a scenario where defi does become the out the, the dark market perhaps and that the centralized sort of trai tries to fit this square peg into a round hole and there's like this natural kind of tension is, are we seeing the beginnings of that presently?
Speaker 1 00:22:35 Is that how you see this unfolding? Take me through your thinking about where going over the next several years. I think you're framing it right. And I think we've seen a little bit of it in the fall of last year of 2022. There were growing concerns about some of the legislation that was being passed around in that it almost at best it oversimplified how it treated defi at worst through defi under the bus pursuit of regulating centralized exchanges. My, my colleagues here, Jennifer Schul and Jack Soloway have both written on this extensively. I think Jack at the time had a essay title Defi must be Defended. And I think there is some concern there, and it's a misconception with libertarianism that it's a support for anything in everything capitalist. And I'll say a lot of people misunderstand that Libertarians are also very critical of crony capitalists or people that are seeking government favors like that.
Speaker 1 00:23:43 And that's the problem we get into with defi is when you don't have a CEO that can be doing the rounds in Congress, you suddenly have a sort of underdog that folks who don't necessarily believe in the foundings of this industry, this space might see that as a easy win as someone to sacrifice, to push forward their own agenda, to try to set up walls or regulatory barriers to protect themselves and limit themselves from competition. And I think there is very real risk of that that we saw really get on paper last fall. And it was good to see so many people speak out against it, against that type of treatment, that type of throwing defi under the bus. But like you said, or like you alluded to, I think we have to be careful in that we're not outta the woods. That wasn't a, I don't think that was the last battle on that front.
Speaker 1 00:24:47 People are going to continue to have to be careful to watch out for things that are gonna affect defi. And I think that's especially true, just again, considering it's not just that it doesn't have a CEO to protect it, but it's not like the big banks that have a general counsel or a team of 30 lawyers constantly scanning new regulatory language. Exactly. Yeah. Yeah. No, I totally understand that. And being, being underrepresented I in Congress from a corporate perspective is perhaps the greatest weakness. Is there a hope of self-regulation or is that literally just a idealistic pipe dream?
Speaker 1 00:25:26 I think it, it is on the table and it is real. It's something that we see every day. The problem is getting everybody to play nice together and to work together, I think now is a pretty pivotal, sorry, pivotal moment. People need to step up and start to call each other out. We've seen it already in this space with like, my go-to example is always Zack X B T on Twitter. We're constantly checking the blockchain and pointing out where things are going awry. But we need a broader approach to that folks to start bringing up or coming together, bringing out standards that they believe in that can help with this. Because the fact of the matter is, the better that we, the better we're able to behave and play nice together, the less likely we're gonna have the teacher come over and put everyone in separate corners of the room.
Speaker 1 00:26:29 Yeah. And it's really just a matter of can we get together to, to do that? And I think it's definitely possible. It's just, it's not an easy lift. And the more we see like the fall, like in the fall, throw one corner under to help themselves, the less likely that becomes. Yeah. But maybe with the kind of fall of FTX, there can be a sort of rallying together Yeah. To make, to put something on the table. Yeah, no, for sure. So, and as we get get into the conclusion here of this, the s e C seems to me, um, you know, commissioner Gensler has certainly made it a point to be, make seems like crypto, to be one of his top objectives targets, if you will. But it also seems to me that he hasn't really been that successful. He's been very good at pr, very poor at actually winning cases.
Speaker 1 00:27:25 I bring to mind, of course, the ongoing legal battle with Ripple, which has now been a couple of years almost, and does not seem to be going in the s SEC's direction, the recent case with their action against library that clearly did not go in in their direction. Of course, they'll take some sort of, uh, admission of, of accomplishment or they've accomplished whatever it is that they're trying to accomplish. But you see Gensler here trying his hardest to pick off various scenarios where he can set precedent for a larger action. Or is that too strategic for, am I giving him too much credit?
Speaker 1 00:28:09 I'll say I hope you're giving him too much credit. It's, but it's certainly on the table. It's been hard to tell. This has been a very unique s e c administration and we've just seen just one, one attack after another on the space. And I think, while I hope that, that that might be too far, I think there's also the possibility, and it's a very unfortunate possibility that even if it wasn't intentional from the start or even the middle, it might work out that way. The end when you get, when you get so much, so much rubble on the ground, you're bound to find a gem somewhere. Right. And that may even be a process that's adopted partway through. It's hard to really speculate on that. But I'll say just the entire approach has been extremely concerning. It's definitely been a move fast and break things approach.
Speaker 1 00:29:13 And when we see people that are trying to start businesses in this space, and especially people that wanna start fully ab above board, check all the boxes, do everything right from day one when they see stuff like this, it just, it makes it so hard to justify doing business in this country. It makes it so hard to justify the investment that takes place. And it's really unfortunate that this is allowed to be the norm. I'm hoping that in the near future, Congress will have a hearing with Chair Gensler and really hash out some of these problems because right now it's, it's just regulation by enforcement, followed by regulation, by press release, followed by regulation, by blog post, as Jake Vinky pointed out the other day. And that's maybe that would make a good movie for this space. Yeah. Make it pretty exciting or definitely make it more exciting than the traditional process.
Speaker 1 00:30:18 But that's really not how you want to see a space unfold in the world. Yeah. I was amazed a actually like really taken aback that after action with Kraken around staking that he would make this sort of like gimmicky video. It was like for a commissioner of the s e c to go on and do some sort of, it was literally like he was mocking the industry. It was very uncomfortable. I try to be lenient and understand with that, that I think it's, the Office hours with Gary is like the series Yeah. Title. And I recognize that it's a play on him being a professor, but it's such a fine line to walk. And I think you're right that it really was uncomfortable. It really was not a good way to present that. And to the same effect, even the, the situation with Kim Kardashian making an entire spectacle, the treatment, it's, it just doesn't quite sit right.
Speaker 1 00:31:26 Yes. It's one thing to raise awareness and make things understandable to individuals that are on the street and not necessarily experts insecurities law or the like, but it's another, when you make it such a gimmick or you really beat the joke. I think he did that whole steak versus steak bit like three or four times in the few minute video. Yeah. Yeah. It's, it was rough to watch. Yeah. I, and honestly, it, it's, it, it doesn't make the industry a joke. It truly makes him in his office more of a joke. And obviously they hold significant power and influence, but I can't imagine business owners invest even foreign investors watching that going, oh, the United States is taking this seriously and this would be a good place to invest. Right. I think they'd seeing going, we're going to Hong Kong, we're going to Singapore. Uh, it'd be one thing if you're give the caveat, I'll play nice here.
Speaker 1 00:32:28 It would be one thing if there weren't any problems, right? If there were no problems, everyone would, was satisfied. Like obviously people are gonna be upset no matter what about how laws are crafted and how regulations are crafted. But let's say that there's no complaints that have been ongoing for months or years and everyone's relatively okay with the status quo doing something like this every now and again. That's a little bit of a gimmick. A little cringey. Sure. I can tolerate. Yeah. Yeah. But when we have longstanding problems on the table, tough. And especially like, one thing that was pointed out, and I apologize, I can't recall who noticed this, but someone pointed out that video actually came out like minutes after the release. Yeah. Oh yeah. But it probably took days to put that together. Absolutely. Was animations or some absolutely script. There's the whole stake bit going out through Absolutely.
Speaker 1 00:33:22 Throughout the video. So clearly he had decided well before the decision was actually made officially. Oh yeah. And that then brings in all these questions. Why is this your priority taking days to do and making a decision before the decision is actually made when we actually have issues that need real solutions? Yeah. Real common sense solution. Yeah. It's really hard to defend something like that. Yeah, yeah. No, I agree man. I, um, I think you would agree that hoping that Congress can, can bring some real sensible, right-minded policy to the table here and help to clarify some of these things. And I think some of this, some of what we're talking about, some of this behavior will start to, to fade away. We really do, both from a regulatory and from a industry perspective, need to move into a more professional environment on the investor's side, away from speculation.
Speaker 1 00:34:19 And it's just, there's so many things that need to occur and, uh, hoping that happens. Your thinking and your writing, your work is helping the industry to do that, helping the space to, to mature. And so really, really appreciate it. Nick, thank you so much for the generous use of, uh, your time and thanking. It's been a great, great help to us. So thank you very much. And I want to reserve caveat the opportunity to, to do this again. Yes. Thank you for having me on the show. It's been such a fun conversation and absolutely. Day or night, just give me a call and I'll be back, run the full gauntlet. I know there's gonna be, for better or worse no shortage of future topics. Absolutely. Absolutely. Thank you so much. We'll talk to you soon.
