LIVE: Senator Pat Toomey's Concerns about the SEC & Crypto

Transcript

bankless Nation we are live here with Senator Toomey Senator Toomey is a senator Republican senator from uh Pennsylvania he's also a ranking member of the Senate banking Housing and Urban Affairs a committee this is a very important committee he's also in the past been somewhat friendly to crypto and some of the things we've been up to Senator welcome to bank list it's great to have you thanks for having me can we start with a big picture we want to cover a few things today we're going to talk about FDX and some other things but can you give us the big picture of the upside the potential that you see in crypto why have you defended it before and how do you think it might help the American people well so here's the way I think about this

um when the internet first came came along and we could exchange emails that was great and at that point it never for a second occurred to me that someday like all consumer products would be happening over the Internet that I'd be able to use an iPhone to hail a car uh I mean the list is endless and it was so transformative of our entire economy so now I look at at what crypto means to me and I think of different crypto projects as like these various protocols and and a lot of them

are like like operating systems on which people can run these apps that are gonna do all kinds of things that probably exceed my imagination as much as everything we take for granted today exceeded my imagination back in 1999 when I first started doing emails so I don't know all the way I mean there's the obvious categories like like payments and identity verification and ownership issues and things like that those those are already pretty clear but I I think the potential of this sort of freestanding independent uh disintermediated uh software is enormous and I I'm not necessarily sold on the

value of any particular token but I don't think it's really about the value of individual tokens I think it's about the underlying technology so your argument is this is an important underlying technology uh like the Internet it's Innovative in that capacity can we frame the question another way and ask it the opposite way which is like what's at stake if the US misses crypto let's say I mean the us is very supportive from a regulatory and legislative perspective of the internet in the 1990s right um what's at stake if we don't take a similar approach to crypto now well an amazing maybe completely transformative wave of Technology happens somewhere else and someone else

and I don't know where that is it maybe it's dispersed maybe it's concentrated probably happens in a context that's not entirely consistent with things that we value very much like the rule of law and intellectual property and privacy and who knows the kind of jobs and the economic growth that we would be foregoing and frankly probably even National Security issues so so I think it would be unbelievably misguided for us not to create an environment where Americans can drive this technology is Capitol Hill talking about

um maybe um what China is doing in the blockchain space they're they're just like there are different kind of cons of the internet there's the open internet and then there's sort of a more closed internet behind firewalls um China is very active in what it what it called like the blockchain space but it has its own centralized um technology that's kind of replacing it is there any talk in Capitol Hill of like what some of uh America's competitors are doing uh you know and you're keeping up with them or like are we even talking about that right now yeah there's some discussion about that and one of the ways that comes up a lot

is a discussion about a central bank digital currency as you know the Chinese have already deployed one to a pretty significant extent and look I think their motivation is pretty bad I think a lot of their motivation is the dramatic extent to which it enhances their ability to surveil their their population and they would love to see adoption uh everywhere it's possible because then they could surveil everyone else too um look I don't I don't like the idea of authoritarian regimes having those Powers by the way I don't want the U.S federal reserve to have those Powers either but but to your question yes it's come up and one of the one of the questions that people have wrestled with

is if the Chinese are using a technology that allows their currency to be used in ways that a dollar can't does it give them an advantage and give them an opportunity to erode the presence of the US dollar as the leading Reserve currency in the world my own view is there are other reasons why the dollar is the reserve currency of the world and it's hard for the the Chinese to displace us especially given they're closed and authoritarian Society but why wouldn't we want to have the most technologically sophisticated currency in the world by the way that doesn't mean a central bank digital dollar I think stable coins issued by private

issuers can play that role but I want the dollar to it's a huge advantage to Americans for the dollar to be the leading Reserve currency and having stable coins proliferating with enhance that center to me I know you're a big uh proponent of some some stable coin regulation I definitely want to get there uh later in this conversation especially uh after we talk about some of the uh the role that the SEC has to play and how crypto is regulated but of course uh we we would be remiss to talk about or not talk about the Fallout of FTX and I just like to take a peek into what the current state of Capitol Hill is uh now that we are hearing this news

about FTX uh what is the gossip what is the conversation that's happening with Regulators on Capitol Hill about about this news well actually you know we had a hearing this morning where we were evaluating nominees mostly for the governance of the FDIC and this came up and you could actually get a real um sort of uh condensed version of of this discussion I had some colleagues who have used the collapse of FTX as a way to paint the whole sector with this broadbush to damn everything crypto is all a big uh scam and thank God you're doing everything

you can to keep it out of our the real economy and so on right I've tried to make the argument that it's a profound and fundamental mistake to confuse bad action by a bad actor with the asset with which the bad action occurred right so what do we know about FDX we know that they took customers uh assets and lent it to a related hedge fund apparently or you know family office whatever you want to call Alameda um that's like wildly inappropriate to do that right with in any any kind of uh Financial Service that does that it's

outrageous but guess what it's been happening in the Fiat world forever uh I mean there's there's an endless list of financial institutions in the conventional fashion form who've done the exact same thing and by the way people who've gone to jail for having done so so this is not a new offense and it is not at all specific to crypto like I've said you know the code committed no crime um but somebody looks like they probably did commit crimes um we the the it's crazy to blame it on crypto you said that Senator you said the code committed no crimes I did are you alone in this this chant in Capitol Hill with The Regulators or our

other particular one the code committed no crime I might be we might steal that from you what about just like the broad concept of FTX and Sam bankman freed are not crypto or not D5 and this was a centralized actor doing fraud like are you the only person telling this story or other people so I don't think so okay I mean uh look so in the house just be completely candid here in the house there are Democrats and Republicans who are very open to this new technology you could say Pro crypto want to get to a thoughtful sensible regulatory framework that's going to work in the Senate unfortunately it's become a little bit polarized because the most outspoken Democrats

have been extremely hostile to this whole Space while I and some of my Republican colleagues have been very open to this and in fact enthusiastic about what is possible um there are Democrats let me be clear there are Democrats in the Senate who are pro-gry crypto definitely I work with some of them we have legislation together there is a very real likelihood even that we'll do bipartisan legislation soon but there's been a little bit of polarization but no I'm not alone in defending the proposition that um what Sam bankman free did cannot be blamed on crypto is there any way to convince your more skeptical colleague Senator to me or what would it take to

convince them or do you think some are just they've made up their mind on this and nothing could happen no facts no arguments could convince them otherwise so some are definitely in that category they made up their mind they don't want to hear the facts so we're not going to win them over but there's a lot who just don't know about this just haven't had the time taking the time had the interest to do the work and let's be honest um you know it takes some work to understand how this goes especially if you're you know an old geezer like me who's growing up with his whole life in the in the Fiat world it it takes some time and effort to understand the the nature of those Technologies two things that I think uh

are important ways to communicate with people who are still open-minded about it one is get people to not necessarily focus on a particular token like like what's a Dogecoin worth and and well how does it change when Elon Musk puts out a tweeter like like that is like kind of ridiculous to focus on that and make that your understanding of this but rather think about the technology think about a series of operating systems that are going to make um make processes and and applications possible that could never be possible before Oh and by the way make it possible without a central intermediary

taking a fee out I mean my friends on the left should be very enthusiastic about the possibility of you know bypassing the central intermediary right they they take a lot of money out of transactions it's their business talking about the banks you're talking about the bank credit card processors everybody in the look The how about the folks that like validate title insurance I mean why the hell do we pay so much money for things like validating ownership there's a much better way to do this so the list goes on and on right and if what I think we haven't done a good enough job is explaining to people the Practical real world applications that are in the

works some already up and running like like file storage and things that are coming down the pike and it's hard right to talk about what's possible in the future and what could be coming but I think getting people to focus on that rather than you know the latest uh collapse of you know Tara and Luna um would would help a long way go a long way well it's certainly rare to be able to see through the forest for the trees in in the crypto industry and and understand the Technologies separate from the actual expression of what we see today so and it's even rarer that these people are regulators and are elected representatives so Pat thank you so much for for being able to see through the noise it's difficult this

industry makes it very difficult to do that uh I know that there's a senate hearing tomorrow uh about the FTX collapse from the Senate AG committee uh are you privy to what might be discussed there like what can we expect to come out of that hearing tomorrow do you have any insight there uh so I'm not on the committee and so I really don't know you know exactly what's going to happen I don't know how this play I'm not even sure who all they've invited to testify but I hope it represents people who can make a persuasive case to look at this for what it is a very bad actor that did some very bad things we need to get to the bottom of it and let's by all means look into that and uh I I think the Department of Justice is looking into

that as well as they should um but I hope that gets separated from the underlying technology I think there's a myth and you know people put forward about crypto like people in crypto don't want uh regulation or they don't want legislation and and the reaction that is like no like we want reasonable um good regulation and legislation that protects uh kind of values that this country was founded on and doesn't stifle Innovation is that too much to ask I want to ask um people listening to this podcast might not be as familiar with how laws are kind of created and how the different committees work together right there is uh the dccpa that was talked about recently which is

some legislation I believe coming out of the AG committee is is anything going to happen with that do we know anything about that and like how do the different various committees talk about crypto legislation like what are you seeing from from your perspective on the legislative front well there's a lot to try to try there um part of part of the challenge is that the sentence not functioning the way the Senate should be functioning the way the Senate actually functioned when I first got to the Senate which is not like a different Century or anything so the committee process isn't working well right the way it should work is if there's committees that have overlapping or tangential or related jurisdiction

they should each produce relevant legislation and then you work out the differences you put that on the senate floor you have a big debate you have amendments and something passes and meanwhile the house should be doing the same thing now you've got two different products and you have a conference where you iron out the differences and you end up with a single product that is the consensus that you can achieve through the conference and then you take that product back to both Chambers for an up or down vote that's the way that's the textbook way that it's supposed to work that is the way that it used to work including when I first got to the Senate but it's not working that way now so unfortunately we've devolved to a situation where what happens is

um so you could take my legislation to fix the broker definition in that came out of the infrastructure bill from a year and a half ago where you could take my stable coin bill I look to find a Democrat counterpart who is going to be a champion on their side I act as the champion on my side we try to get broad buy-in and then we get the key players who are The Gatekeepers for extraneous legislation going into a must-pass bill of which we have three or four typically every year and there's a this is a this is a very opaque process which is part of what's so bad about it but that's that's what we're left with at this point and

frankly I'm going to use that process to the maximum extent I can for some of my crypto priorities and the year's not over yet we still have a shot at getting some of them done this way but shouldn't work this way but that's where we are at the moment one of the big reasons why this FTX disaster got so big was because a lot of the lack of clarity that's on the inside of the United States for our own regulated into crypto institutions like Gemini and coinbase they just haven't been able to produce some of the products that were so attractive that FTX was able to produce because they were in the Bahamas and a lot of the ire out of people in the crypto space has been directed towards Gary Gensler and his uh hard-handedness towards American

companies and his also neglect of external companies like FTX is there what's the is there any do you share in that frustration of Gary Gensler in the SEC or what's the role what's the opinion of of that the gensler's administration by your fellow regulators well let me just tell you I have been arguing with Gary Gensler publicly and privately for two years now since he took this job and the central argument that I make my my central problem is to say Mr chairman you have repeatedly stated that virtually every token is a security I don't happen to agree with that but

given your assertion you owe it to us to lay out publicly a very clear way in which people who want to comply with the law and regulation can do so how does an issuer comply what is the criteria what is the rules how do they do that if you're operating an exchange what does that mean what do you have to do in order to be in compliance with SCC the rules that we have for a stock exchange for instance don't all apply right I mean custody and settlement and things like that it's different in in crypto and and my big criticism of chairman Gensler is he has never laid out that Clarity he says oh come on in

and talk to us and we'll talk to you but that's no answer I'm by the way during those conversations their enforcement lawyers are in the room taking down notes and next thing you know you get hit with an enforcement action regulation by enforcement is a terrible terrible approach and the problem with this uncertainty that hangs over just about everyone who's developing a protocol is they don't know whether they're going to be you know there's going to be a knock at their door from the SEC about what they've done and and so the SEC has created the incentive for people to go offshore this is this is terrible it's terrible because America loses the

opportunity to have its leadership role in this space it's terrible because when they go offshore they're going to go to a place that has a very LAX regulatory environment then customers are going to experience the kind of things that we've seen at FTX so at all levels this is a disaster this this is why we Congress needs to step in provide the guard rails create the clarity and Let The Regulators which may or may not be the SEC but let whoever we authorize through legislation um objectively enforce the law and provide that certainty it would be so helpful for this whole space but by the way I think everyone crypto maybe a lot of

people listening to the saw your clip of you putting uh Mr Gensler on the hot seat and asking those questions of like hey what actually is a security like can you define it um well done we appreciate you asking those questions because obviously we're not in the the chambers and the Halls where those questions can be asked um I I do also like I guess if you're the Steel Man a Regulators argument on this or Gary Denzel's argument maybe he'd pushed back and point to Congress and say hey we don't have Clarity we don't have clear no that's not his argument right that would be understandable yeah you you could a reasonable person could say that could say well look the Securities Law and the case law right Securities Law to a large degree is court cases that have have

emerged over decades the Howie test the Howie test being one right uh these uh are not well suited for this brand new technology so rather than try to bang a square Pagan or a round hole Congress why don't you address some of these difficult issues like under what circumstances is a token actually a security and under what circumstances is it not for instance but they won't do that that would be reasonable if Gary Gensler said that but he doesn't say that he says everything's a security it's all my territory I own it and by the way I'm not going to tell you how you can comply with my rules until I show up and whack you with an enforcement action that's what's so

objectionable to me why why was it objectionable no why is he doing this this is why is that this the approach of a regulator I I'm not sure is the honest I don't know I have asked him this he he would of course completely reject my characterization he would say I've done nothing of the sword I've been very clear the law is very clear everybody can read the law everybody should know that their projects are all Securities it's obvious and I don't know what you're complaining about that's that's basically some version of that is what he would say I just completely disagree do you think that there will be some Fallout uh from the Ft the recent events of of FTX that will come back to

Regulators like the SEC so the question of why didn't you do more this sort of thing um do you think that's that's fair do you think the SEC or cftc could have done more in this situation or what's your explanation of who is at fault I guess in this particular situation so uh there's there's a technical uh question and then there's a more um uh a broader question right the technical question to my mind is to what extent did they actually have jurisdiction over a foreign entity that's operating out of a different you know political entity right obviously the SEC does not have jurisdiction over the Bahamas um but to the extent that Americans are investing or are involved does that give

them some jurisdiction that there's some legal questions I don't really know the answer to but uh these are well known so we'll get answers to that the bigger question though the bigger Fallout should be that hey the lack of clarity probably contributed to this whole mess because if we had provided Clarity and we had provided clear rules and they applied to everyone then the coinbases of the world the the other exchanges that that all they want to do is be in compliance so that they can compete on a Level Playing Field that's that's where business would gravitate to and you wouldn't be able to successfully operate this outpost on the Bahamas where no one would know what

you're doing if the if their competitors had the uh certainty of this regulatory regime so I would argue that what the SEC has done probably contributed to the growth of FTX and that ought to that's something that they ought to feel some heat for that yeah I think I can speak for the entire crypto industry which we definitely feel that that was the case uh that's that's from users who lost funds in FTX to builders like Brian Armstrong the CEO of coinbase all feel very very frustrated that the SEC created the Paradigm that allowed for FTX to get so incredibly big uh Senator Toomey what what do you hope Congress does as a result of this

um one thing I've learned while talking to so many legislators and Regulators out there is that everyone is saying that the solution for this mess is legislation on Capitol Hill um so if you had a message to all of your fellow congressmen and Senators uh what would you say yeah I would I've been saying this for a long time and we're late to the game but it's not too late let's let's pass legislation my suggestion would be let's try not to do a whole comprehensive all things crypto all at once Omnibus Bill that's probably not gonna work but we don't have to do that either we could do a little bits so I've got a bill right now with the Democratic co-sponsor that would fix the problem with the broker

definition so that we wouldn't be technically obligating validators to come up with information about individuals behind transactions when obviously they don't have that information right so let we can fix that I think we actually have a pretty good shot at fixing that before this year is over I've got a bill with Kirsten Cinema which would allow for small transactions to be paid for with crypto that is sold and for which there wouldn't be a capital gain so we would alleviate the huge you know compliance burden of tracking all of that but really what I think we really need to do let's let's start with stable points right stable coins are a discrete category they're relatively easy to

understand I've got a framework out there that's very similar to the framework that Cynthia Lumis and Kirsten gillibrand came up with if we could get something done on stable coins that would be like this huge step forward I think it would be extremely encouraging it wouldn't by itself solve all the problems we still have the issue of how you how you decide what's a security and what's a not what's not a security but if we could if we could resolve the question of who can issue stable coins under what conditions how is it regulated I think that would be very very constructive be a great first step and then hey after that we you know we take on the next challenge how close do you think we are to doing something like that

um I'm hoping that I'm quite close to announcing a bipartisan stable coin bill um getting it across the goal line this year will still be very difficult I'm not gonna not gonna get you I I think we could get to a uh you know introducing a bill that has a bipartisan list of co-sponsors and that's a huge step in the right direction right the house was trying to negotiate something between Maxine Waters and Patrick McHenry the chair and ranking member respectively on uh our counterpart Committee in the house they never really were able to quite get there if we could get a bipartisan product that dealt with this and put a lot of

pressure on the administration to come to the table and and get this resolved and the administration I will say In fairness is some in the administration understand that we really should do this we really need to get it done question is can we get them to a place where they'll do it in a fashion that allows the space to thrive as opposed to be stifled I think that's very important and that's kind of key right is um you know which is a reason I think we like stable coin regulation as a starting point is because at least when you're talking about the centralized stable coins like um the stable coin usdc from from coinbase and circle right these are very kind of known quantities these are centralized products in order to do that in a way that doesn't stifle innovation

of some of the things that we're building in defy um interestingly enough it was revealed that um SPF was uh that same bag would freed behind FTX was very involved in some of the legislation behind the proposed legislation of the dccpa and some of that felt so the crypto industry the crypto Community like there was sort of a pulling up the ladder an entrenchment of regulatory capture entrenchment of a larger institutions now FDX had become an instant institution these Banks and kind of a you know push against defy so making certain things into centralized Finance um illegal making all front ends of decentralized Finance

um have to register as a as a broker dealer as something uh and so we're very worried about about I guess Congress passing legislation on topics that are still emerging and not understood stablecoins is not one of them necessarily but it also could be if it's done in a sloppy way how can we prevent the sloppiness uh look the there's always a danger of that but I think the danger is greater if we do nothing right because if we do nothing then I expect the administration to act and then you'll have Regulators simply declaring that they have the authority they'll find a lawyer who can make the argument and that might be extremely hostile to the space

um look I have a lot of respect for the governors of the Federal Reserve for instance however I'm also of the view that it is like fundamental to the DNA of a central Banker to be very hostile to anything that faintly resembles privately issued money so I don't want them regulating this face because I don't think it's not a treasury well and then treasury there's there's a whole set of reasons but but still there's gonna have to be so for instance if you advertise yourself as having an asset-backed stable coin and you're you're claiming that it is backed with Fiat assets then it really ought to be backed by those assets right and so a disclosure requirement where it

can be proven that you do in fact have the cash and cash equivalents that you claim you have that is a reasonable thing for someone who claims to have an sfx stable coin but I've got some colleagues who think we should just have an outright ban on algorithmic stable coins well I I for one am actually skeptical about whether you can develop a workable algorithmic stable coin but what do I know right somebody might very well figure out how to do that so I wouldn't presume to ban it that's a terrible idea a disclosure you know making sure that somebody who's offering a stable coin that is not backed by any uh Fiat assets that that ought to be very clear so that

investors know what they're getting into but I I don't want to be shutting down whole potential categories honestly this whole conversation uh Senator to me makes me uh optimistic actually I didn't expect all of this coming in but I think many in crypto take kind of a skeptical lens to you uh the legislative process and Capitol Hill but talking to you uh it's pretty optimistic um and honestly I mean this is what the legislative uh you know assemblies in in DC are supposed to do they're supposed to represent the people and crypto after all is a technology by the people and for the people right it is a technology that I think that the framers of the Constitution would very much support um I guess my last question for you as

as we close here Senators how can crypto people who are maybe Jaded by the politics of of things things they see in Washington how can they make their voice heard how can they get involved in the process many of them feel sort of powerless but what can they do to support efforts towards good legislation in DC to make sure that we don't miss out on this so I I would say that there is a very significant number of members of the House members of the Senate who don't know a lot about this space don't actually have a well-defined set of views but they're open-minded they need an education and it's much better if people who actually

know what they're doing because they're active in this space provide that education rather than if it all comes from whatever they read on the front page of the daily paper which of course is going to be the FDX blow up so don't underestimate your ability to have an influence especially with something as new and new to members of Congress as this space is Reach Out sit down with the staff that handles this most of them will take a meeting with you if you're a constituent so look up your member of Congress and ghosts go have a meeting you'll meet with their staff most likely but you may find that the staff is actually pretty

well informed you may find that they don't know anything about it but engage right and if you are seen as a knowledgeable person who is trusted to be a straight shooter um you'll be surprised how quickly um people will will start to seek your your input that that's what happens in this space so engage engage with your members of Congress good thought to end with engage in the political process as well as we are evaluating crypto too Senator Toomey thank you so much for your time we appreciate you coming on Bank list all right thanks for having me guys all right keep fighting all right we'll do