First Republic Fall Out and a Regulatory "Silver Lining"

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1:29Welcome to Real Vision Crypto Daily Briefing. I'm Ash Bennington. Today I'm joined by Brett Quick, Head of Government Affairs for the Crypto Council for Innovation. Brett, welcome to Real Vision. Hi, Ash. Thanks for having me. It's a pleasure to have you with us for the first time. We have a lot to talk about today to do a comprehensive overview on what's happening from a regulatory and government affairs perspective. But first, I wanted to brief our viewers on a crypto-adjacent story this morning. And that, of course, is First Republic trades under the ticker FRC, which has been seized by regulators this morning.

2:00Most of its operations purchased by J.P. Morgan. Here are the data points you need to know. Those purchased assets include$92 billion in deposits,$173 billion in loans,$30 billion in securities. And FDIC will share JPMorgan's losses in the event that they have them, this data coming from the Wall Street Journal. Final couple points. I want to contextualize what's happened here for our viewers after those key data points. We've had$100 billion in assets that flew out of First Republic Bank in just a few days following the Silicon Valley Bank collapse. This is the second largest bank failure in U.S.

2:38history, right behind WAMU, Washington Mutual, in 2008. three of the four largest bank failures in US history have occurred in the last 60 days also by the Wall Street Journal. Brett, that's the backdrop that we find ourselves in today having this conversation about what's happening from a regulatory perspective. How do you contextualize it? How do you think about it from the crypto slash digital asset perspective? What's happened this weekend and this morning? Yeah, thanks, Ash. Look, the banking sector has been under some pretty significant turmoil, right? And I think from Silvergate to Silicon Valley to Signature, there have been questions about, you know, crypto's role in that.

3:20I think Adrienne Harris, superintendent of DFS, was very clear in her testimony before Congress a few weeks ago that, you know, the collapse of Signature was not related to crypto, that the deposits that we saw in outflows from the bank were, you know, in proportion to the overall number of crypto deposits that the bank had, which was roughly 20 percent. So I think what we're seeing with First Republic, I mean, it's got it's sort of an unprecedented event. It's I think it's a huge deal in terms of, you know, the bank regulatory environment. The fact that the FDIC under, you know, Gruenberg allowed a G-SIB to get bigger by acquiring First Republic.

4:01I think those who may not know that's globally systemically important bank, one of the two big to fail banks here in in the United States. Yes, yes. Thanks, Ash. So there's eight GSIBs. They're generally frowned upon by the regulators increasing in size because they're already quite large. So the fact that JPMorgan Chase is taking on all of the deposits and loans and the securities, I believe, of First Republic is a strong signal of what's happening. And I think that - Let me just make sure I understand that point correctly. The notion here that generally it's frowned upon when the GSIBs continue to grow, to accumulate more assets, to accumulate more loans and more deposits.

4:43That's something that's generally not smiled upon in Washington because it means these large too big to fail banks are getting bigger. And what you're saying here, if I understand you correctly, is it's an interesting signal to see JP Morgan, the largest bank in the United States, be greenlighted to make this acquisition. Perhaps, perhaps it suggests something about the necessity of these assets falling into stronger hands in the view of regulators? Yeah, I mean, listen, I think since we've seen the turmoil in the banking sector over the past few months, there's been a lot of discussion in Washington about what are the appropriate regulations for banks of different sizes.

5:18And you all probably recall that in, I believe it was 2018, under the previous administration, there was a legislative effort to tailor bank regulation based on size. And one of the things that that legislation did was it increased the asset size of banks that are subject to a number of post-crisis rules that apply to the largest banks. So it moved from about$100 billion in assets of the line of demarcation to about$250 billion. I believe that First Republic was right around$225 or so, so really just under that line of having to comply with some of these extra steps. So Comptroller Sue at the OCC has been saying that, you know, regional banks need to be subject to long term debt requirements, need to be subject to annual stress testing, because in the event of failure, they ultimately just have to go to a bank that, you know, the regulators view as already too big to fail.

6:10So I think it'll be an interesting conversation amongst lawmakers and regulators on how to address some of this if there need to be tweaks to the laws that were passed in 2018 that apply to the banking sector. But it's clear that overreliance on uninsured deposits is causing a lot of problems, totally unrelated to crypto. But understanding that in the case of Silvergate, at least, they had a high exposure to FTX. They actually were able to unwind themselves without intervention, without loss to taxpayers, without loss to depositors. But now we're seeing a lot of sort of knock-on effects in the banking sector, which raises a lot of questions about appropriate regulation of that sector and what they sort of have on their requirements.

6:56Just to make one point here about this, before we move on to the crypto asset component of this, you mentioned this idea of uninsured deposits. One of the things that these banks shared in common, particularly what we saw at Silicon Valley Bank, was an incredibly high skew of the proportion of assets over the FDIC limit, $250 ,000 for individuals,$500 ,000 for couples. When you see that skew, it's suggesting that perhaps that there's going to be a challenge because there is a lack of FDIC insurance relative to the deposit base. There may be, highlighting may, be deposit flight out of those banks as people who are high net worth individuals who have those assets there have the capacity to move those assets elsewhere.

7:33Which brings me to the sort of the broader picture here. The two sort of biggest factors, I think, here that are affecting what we've seen, these bank failures and the three of the four largest in the last 60 days. Number one, we obviously have this environment of rising interest rates, which has skewed some of the macroeconomic and funding conditions that bank faces. And number two are these, of course, cell phones, the ability to move assets to banks very quickly. Jim Bianco, in a conversation I have with him, I believe at the end of last week, made the point that when you have a bank run in the 1980s or 1990s, a fast bank run happened in a couple of weeks, maybe over months.

8:10When a fast bank run happens here in the digital age, it happens in a matter of hours. This obviously, these factors, technology and rising rates very much at play in the crypto world. Translate this for people who may not know why these factors are also factors in what's happening on the digital asset slash crypto side and how it influences crypto specifically. Yeah, I mean, you raise an excellent point. The ability for a run to happen super quickly was not something that was contemplated by, you know, a lot of the regulations that are in place. There was a lot of discussion post, I think it was Silvergate, that, you know, they should have been subject to the liquidity coverage ratio requiring that they have, you know, enough on the books for 30 days of outflows of deposits.

9:00But no one really could have contemplated, you know,$40 billion in assets leaving in a day. And that's exactly related to the fact that we can do this on our phones. We can do it so quickly. Messaging apps, things travel so quickly. Everything is able to just happen in a much faster pace. I think the nexus with crypto is really that what we're talking about in crypto, in the sort of revolutionary technology underlying everything, is that we can do things with less intermediaries. We can do things in a more peer-to-peer way, with more efficiency, instantly, more transparently. So I think there's a lot of opportunity for the technology to solve some of the problems that we're seeing right now in the banking sector that, you know, I think has caught everyone off guard, certainly the regulators.

9:51Hey, everyone, we're going to take a quick pause and hear a word from our partners. We'll be right back.

10:00So let's talk about that specifically, regulators, legislators, the executive branch, where we stand with this now. Big picture, obviously, it's been an interesting couple of months. the crypto asset and climate report coming out from the White House. Maybe the name tells you everything you need to know about that report in the way that it seems to be skewed. And also the fireworks that we've recently had on the Hill. Give us your 50 ,000 foot overview of a regulatory perspective happening right now in the United States specifically. Sure. So there's a lot to cover. I think post the executive order issued by President Biden, I guess about a year ago, there was a lot of optimism.

10:36There was a lot of positivity around that and what would come from that and some of these reports that we would see subsequently about that. Give us a little bit of context on that executive order, which ordered essentially these studies. And as you mentioned, the reports to come out, give us a little bit of context on where we were a year ago and how we've gotten to where we are today. Sure. So President Biden issued an executive order again, maybe a little over a year ago, instructing a number of agencies. I think it was 20 something agencies to look at different aspects of crypto and blockchain technology and how we can certainly, you know, provide protections and rules, but also, you know, really harness the promise of the technology and, you know, promote innovation here in the United States.

11:17The tone and message of the executive order was really positive, I think. And it was perceived as a positive approach. And it was kind of, you know, the first recognition officially of the administration in the United States to say, okay, we're really going to look at crypto and how we can make it work here from a regulatory perspective and really utilize the technology here to kind of advance the way we do things. Unfortunately, what we've seen post-EO is a number of reports that have not been really reflective of the tone of the original executive order. They've been much more negative on the promise of the technology and what needs to happen from a regulatory perspective.

11:59So I think there's been a lot of disappointment about the individual agency's approach to crypto. You know, certainly we live in a post FTX environment where that has sort of, you know, put a cloud over a lot of the thinking about the way that crypto should be regulated and how it should be able to interact with consumers and investors and what the rules around these companies should be. But the reality that, you know, folks in crypto are certainly, you know, well aware of, but it's not maybe obvious to everyone. The reality is that what FTX did and what Sam Bateman Freed did was, you know, classic fraud, something that's been illegal for 100 years.

12:39They took a centralized entity operating it offshore and a bad actor and Sam defrauded customers of their their funds and violated his own terms of service. Well, we should point out, of course, that he's been charged but not yet convicted and, of course, innocent until proven guilty. Sure. Thanks, Ash. Good disclaimer there. But what he allegedly did was classic fraud. It was not related to the technology of crypto other than the fact that there's a lot of interest in being in the crypto space. And, you know, what's notable is that when Chairman Gensler testified for the first time in 18 months in front of Congress two weeks ago, and in exchange with, I believe it was Congressman Torres, Congressman Torres was asking him about offshore exchanges and why the SEC isn't sort of pursuing reining in offshore exchanges and doing something about that.

13:31Chairman Gensler acknowledged that it's a lot harder to regulate offshore exchanges from the United States and to pursue, you know, enforcement actions against them. He also acknowledged in the same exchange that Americans are using offshore exchanges, whether they're supposed to be or not. And we know from, you know, this sort of postmortem on FTX that there were Americans using FTX.com, the Bahamas-based exchange, where they weren't supposed to have accounts, but they had VPNs and they were doing it. So where this leads us back to, where we sort of have a misalignment of, I think, fundamental understanding of where we are with Chairman Gensler and with the SEC, is that we want to keep crypto in the United States because we want the innovation to be here.

14:17We want the job creation to be here. We want the economic growth. We want to, you know, as the United States continue to have, you know, the position that we have in the global financial system. But we also want it to be within our regulatory perimeter. We want our regulators to be able to thoughtfully establish consumer protections, investor protections, rules of the road, both for transparency and clarity for the industry. And also so that consumers have the confidence to adopt the technology. But we want that to be done here. And unfortunately, it seems like there are those in this administration that are just happy for it to go offshore.

14:54And we think that's, you know, incredibly misguided. We look at what we're seeing now with chip manufacturing, where, you know, we're sort of desperate to bring chip manufacturing back to the United States after it was offshored, you know, 30 years ago, along with many things in sort of an offshoring of manufacturing. Well, I suppose the difference with chip manufacturing is it's incredibly expensive. It requires a tremendous amount of investment, tremendous amount of foresight. The goal here to establish more of a crypto-friendly regulatory environment in the United States would just require legislation and a framework from either the executive branch or from Congress or ultimately from the courts in the event that it should wind up there.

15:33But give us a sense of what you think the forward trajectory is. You've done a great analysis in terms of the layout of where we stand. Where do you think we are along that path? And what are the probabilities of us getting to a place where you see a favorable outcome? Well, you mentioned the courts. And, you know, unfortunately, I think we're in a position right now where a lot of these decisions may be left to the courts. And the silver lining there may be that it does create some clarity for crypto and allow, you know, companies operating in the United States and wanting to operate in the United States to have some type of transparency and clarity to stay here and continue to develop here.

16:10But that takes time. That's not something that happens even this Congress. But I'm going to go back and just ask you to explain this to people who do not have legislative affairs or legal backgrounds. Give us the framework of understanding for the relationship between Congress, which makes laws the executive branch, which executes them through a series of agencies and the courts, because there really are three separate trajectories here through which things get done in terms of policy in the United States. Yeah, you know, three branches of government. So the situation right now is that the SEC obviously says that most crypto assets, according to Chairman Gensler, everything other than Bitcoin are securities and they should be subject to existing securities laws.

16:51Those securities laws were designed 90 years ago for the most part, before we could have contemplated the Internet, much less the way that technology has developed over time and the opportunities with blockchain technology and with crypto. So we can come back to sort of why those laws just don't work for crypto. But the SEC under Chairman Gensler continued to say just comply with these laws. There's no there's no problem except that you're not willing to comply. There's not a clarity problem. Of course, you know, Coinbase is kind of the most famous example right now in the headlines. Coinbase is a member of the Crypto Council.

17:29they were served a Wells notice basically saying that, you know, almost every aspect of your business is in violation of securities laws. Which is interesting because they just filed an S1 when they went public not that long ago, which detailed - Right, just a few days before Chairman Gensler was sworn in, I believe. Yeah, and which detailed effectively their business plans and their obvious reliance on the digital asset cryptocurrency space. So it shouldn't have come as a surprise to anyone. It should not have come as a surprise because that was certainly a signal to investors that the SEC was not going to raise a red flag with these core elements of their business.

18:06Staking, for example, was mentioned numerous times in their S1, their change business being their big source of revenue, their wallet business. All of these things are now apparently in violation, according to the SEC, of securities laws. So Coinbase disagrees with that. Coinbase announced, I believe, last week that they are suing the SEC for them to take up their petition to do a rulemaking on crypto. So where this leads us is that this agency and executive branch is saying, we have the authority that we need. We have the existing authority based on these laws that were passed by Congress, and you have to comply with them.

18:42Coinbase has the example. The industry is saying those laws don't apply to us. So then that has to go to the judicial branch, to the courts, for them to decide who's right in that scenario. And that takes a lot of time, It takes a lot of time, a lot of resources. It would be, you know, certainly preferable for legislation to be passed in the shorter term that clarifies a lot of this. We know that there are a number of, you know, really champions of the industry across the political spectrum. You know, those that really are just focused on the innovative, the innovation aspects and the opportunities for, you know, for our economy and for the financial system.

19:22And then there are those that are concerned primarily about consumer and investor protection. And they recognize that this is a technology and an industry that consumers are interested in being a part of and that they want to utilize. And that if that's the case, then we need to put, you know, appropriate guardrails and rules around it. Let me ask you this to get back to the points that you made about Chair Gensler and SEC and the administration. For folks who don't know, explain the relationship between the SEC and the presidency, specifically, to what extent these views are the views of Mr. Gensler specifically, and to what extent they are broadly reflective of the views of the administration?

20:00Well, that's a very complicated question. I think largely we see a lot of Chairman Gensler's personal views. I think that the administration has a lot of different views within it. You know, there are certainly folks within the administration that I believe want to, you know, be more constructive around crypto regulation. I mean, you know, the CFTC, for example, under Chairman Benham, he has, I think, a much more constructive approach to trying to bring crypto under, you know, the regulatory purview of his agency. and he wants to do that in a way that does not stifle innovation but also does provide the badly needed consumer protections.

20:47So I don't think that the industry or that the administration necessarily all has the exact same view. I think that Chairman Gensler as an individual has a particularly crypto-skeptical view and I think, unfortunately, a misguided way of even sort of dealing with that skepticism because offshoring it for other jurisdictions to determine the best way to regulate and to allow the industry to develop is not helpful to American consumers, investors, or to our position in the global financial system. Hey, everyone. We're going to take another quick break and hear a word from our partners. We'll be right back to the Real Vision Crypto Daily Briefing.

21:35So what are the odds in your view of us getting legislative progress here during the 118th Congress here in 2023? Is it something that you handicap as a high or low probability and why? So it's hard to attach an exact probability to this where crypto is very unique in that it enjoys really broad bipartisan support. Crypto is unique in that we're asking for regulation. You often see industries in the United States going to the government and saying, please regulate us less. We need less bureaucracy. We need less red tape. And in crypto's case, we're saying we need we need a regulatory framework.

22:11And we're not even into the details yet of what that looks like. We just need a regulatory framework for all the reasons we've discussed. So we've seen a ton of activity in the House in the past couple of weeks. and we're going to see a lot more over the coming weeks in the House Financial Services Committee, also in the House Agriculture Committee. Chairman Gensler testified in the Financial Services Committee. They had a hearing on stable coins. They had a hearing on market structure. The House Ag Committee had a similar hearing on market structure at the exact same time, addressing sort of their respective jurisdiction of the CFTC and the idea that the CFTC should have authority to regulate spot markets beyond just their fraud and manipulation authority that they have right now.

22:57So we know that there's a lot of activity. There's a lot of work being done to work on legislation. Congress is a very deliberative body. The Senate is the most deliberative body maybe ever, right? So getting something across the finish line, there's a lot of steps between now and being signed into law by the president, of course, after passing both chambers. The Senate is complicated by the fact that we have Chairman Brown at the head of the Senate Banking Committee who, you know, for a period of time seemed very uninterested in doing any sort of legislation around crypto. He has since then signaled that he would be interested in legislation, but it's hard to see how he would get on sort of the same page as the other more pragmatic members that are wanting to work in the crypto space because we could definitely label him as a strong crypto skeptic.

23:50So, you know, I think at this point, we're doing the work with members of Congress and with the agencies to educate them on the benefits of the technology and the industry and why regulation is so badly needed, regardless of really how you think about crypto, regulation is needed in the United States. And we're confident that there's a lot of folks who are going to sort of continue to put pen to paper to try to come up with good rules and regulations that can get bipartisan support. But I don't want to suggest that there aren't a lot of challenges politically and from a process perspective between now and the end of this year or the end of this Congress.

24:29Well, let me ask you a question about the word that you just used there. And I want to play a bit of devil's advocate there. This idea, whenever we have someone on from an advocacy group or a lobbying group, they always begin the conversation by saying that this is a bipartisan issue. And they mentioned, for example, as you mentioned earlier, Congressman Richie Torres, from here in New York, a young progressive Democrat who is quite friendly toward crypto. To what extent is this really bipartisan? Because looking at this from the outside, it's hard to see that there isn't a significant skew in a partisan direction on this issue.

24:59Do you have a sense of where we are in terms of proportions in the House or the Senate of opposition versus support for this issue? Look, I think it continues to be very bipartisan. And, you know, candidly, I think post-FTX, there was a lot of concern about what that would mean for some of the folks that have wanted to be, you know, really constructive with the industry in Congress. And I don't think that they've wavered. You know, we've seen a number of pieces of legislation with really strong bipartisan support. While Ms. Gillibrand, you know, they're going to be reintroducing their bill. They've indicated that it's going to have stronger consumer protection, stronger cybersecurity.

25:35That bill, as your listeners, I'm sure, know, is really sort of a comprehensive regulatory framework that it would establish addressing, you know, securities, commodities, stable coins, consumer protections, disclosures, really, you know, all of the big pieces that the industry needs. You know, that's moving forward. You mentioned Congressman Torres. There are a number of lawmakers who continue to believe that the technology really has the potential to bring more folks into the financial system, to reduce costs, to increase access, to increase efficiency. You know, a lot of that is really indisputable.