#314—What a Trump administration means for digital assets

Also, the systemic problem with bank supervision

Nov 18, 2024

Welcome to Yaka Stuff, our weekly newsletter that covers news, industry perspectives, and updates from the Hard Yaka ecosystem. Check out our last report here.

This week:

What a Trump administration means for digital asset policy
18 states sue Gensler for “constitutional overreach”
How banks are oversupervised
Stuff happens

1. What a Trump administration means for digital asset policy

The digital asset market and industry is starting to thaw after years of chilling effect in the space under the leadership of SEC chief Gary Genser.

According to our friends at PolicyPartner, “this trend should reverse almost immediately” as major players anticipate the clearing of existing regulatory roadblocks.

And as Hard Yaka co-founder Greg Kidd intimated to me, much of that initial work will begin at the most fundamental level. We still need to answer basic questions including:

What is a security, a commodity?
Who regulates what and why?
If we need to register something, how does that process work?

From there, we have a few core regulatory objectives. Here’s PolicyPartner:

Federal regulation of retail access to spot digital commodity:
This could come via joint SEC / CFTC rulemakings or memorandums of understanding or legislative action. Key to a future structure is adequate classification and definitions of digital assets. We believe clarity for issuers of digital assets is highly likely to be included in this regulatory solution – grandfathering, workable measures of decentralization, developer incentives are all very real possibilities. Regulatory clarity for regulated institutions, like broker dealers and RIAs, in their dealings with digital assets is also a likely result of this element.
Nomination of federal banking regulators that will permit institutions to experiment, develop and use DLT:
Bank regulation and supervision are not typically politically charged appointments and the job does require a high level of expertise and commitment to the banking space. Future policymakers will need to balance the mitigation of the risks digital assets could introduce to banking organizations – a nasty scandal or loss of customer funds down the road could have the opposite of the intended effect. Selling DLT to banks or using DLT to disrupt banks is one of the most tantalizing themes in our view.
A regulatory regime for stablecoin issuers:
A regime will enable stablecoin issuers to expand access to stablecoins in payments, e-commerce, banking, securities settlement, and cross-border payments. Regulatory clarity for these issuers would introduce consumer confidence, enabling commerce to realize the massive potential of programmable money. We believe it’s useful to imagine a future regulatory regime that is acceptable and favorable to Tether – this group has a direct line to the White House.
A total reset of the US engagement with international regulatory bodies:
US encouragement of IMF, World Bank, BIS, G7, and G20 initiatives will need to take a different approach. Ex-US member countries who are well underway in the development of countless programs to tighten the grip of US control of the international monetary system will experience unexpected friction from their former partner. The intensive emphasis on compliance, the identification of the intermediary, enforcement of non-compliance of AML standards are all likely to be deprioritized in preference of a race to innovate.
Regulatory reversals and CRA challenges:
Controversial rulemakings are likely a prime target for an incoming Trump policy team and the congress. Which rules exactly will be reverse is not yet clear - less controversial rules like the custodial portion of the IRS gross proceeds rule, the FDIC's pending third-party record keeping requirements may stick. Conversely, the non-custodial add-on, the SEC's Dealer, safekeeping, and Exchange rules can best be looked at as brief but feverish nightmares.

2. 18 states sue Gensler for “constitutional overreach”

Here’s Decrypt:

Filed Thursday, the suit from 18 states and their respective attorneys general—all Republicans—along with the DeFi Education Fund, alleges that the regulator violated the U.S. Constitution in its approach to regulating digital assets.
“Without Congressional authorization, the SEC has sought to unilaterally wrest regulatory authority away from the States through an ongoing series of enforcement actions targeting the digital asset industry,” the lawsuit, filed in a federal court in Kentucky, argues. “The SEC’s sweeping assertion of regulatory jurisdiction is untenable.”
The suit further alleges that the SEC knowingly defied standard procedure under Gensler’s leadership when it came to crypto, and so the agency intentionally avoided releasing any new crypto rules—as a means to avoid the alleged issues with its “regulatory land grab.”

That same day, Gensler essentially defended himself at the Practising Law Institute’s 56th annual conference, what CNBC described as a “farewell speech”:

Gensler offered a full-throated defense of his approach to crypto.
Gensler repeated his assertion that while bitcoin is not a security, the SEC’s focus “has been on some of the 10,000 or so other digital assets, many of which courts have ruled were offered or sold as securities” and are therefore subject to the SEC’s purview.
He again asserted anyone offering to sell securities needs to register, and that intermediaries such as broker-dealers, exchanges and clearinghouses also need to be registered.
He said that the failure to properly police the crypto industry had resulted in “significant investor harm” and that “the vast majority of crypto assets have yet to prove out sustainable use cases.”

The rumor is that Gensler will step down after Thanksgiving.

3. How banks are oversupervised

Raj Date has a great writeup over at Open Banker from September (via Jun Hiraga), where he highlights the systemic issues around bank supervision in the U.S. Raj was the acting head of the CFPB and served as its first ever Deputy Director.

Part of the issue, according to Raj, is deeply cultural:

Regulatory agencies are just like every other talent-intensive organization: If they focus on too many things, they absolutely will miss the forest for the trees. But regulatory exams are massive in scope and sprawling in nature. This inevitably obscures those issues that are genuinely important to safety and soundness. Indeed, the Federal Reserve’s own post-mortem on the 2023 Silicon Valley Bank failure noted that before its demise SVB had 12 “Matters Requiring Immediate Attention,” precisely zero of which focused on the interest rate risk that ultimately drove its fatal bank run.[3]
This lack of focus is compounded by a monomaniacal obsession on process as opposed to substance. Borne out of the quite correct notion that prudential regulators should be guarding safety and soundness, not dictating business strategy, this approach has curdled into a frustratingly diffuse and oblique way of thinking and talking about substantive risks. Rarely does a banker hear a declarative statement like “your bond portfolio’s mark-to-market value is going to be severely and visibly impaired if rates rise quickly, which seems pretty likely.” One would be much more likely to hear something elliptical like “you have insufficiently documented your compliance with your interest rate risk governance and controls, and your second- and third-lines of defense have failed to detect that lack of documentation or escalate it through approved channels to the appropriate executive and board committees.”

Moreover, given the timeframe for said process, bank examinations ultimately become obsolete by the time they time we have actual exam results:

Most obviously, managing overly broad examination agendas requires, at least in today’s breathtakingly manual approach to supervision, long cycle times between the activities being supervised and the rendering of final supervisory results. Bank management teams and boards typically receive final exam output not weeks or months after the beginning of the time period examined, but rather quarters or even years later. In a fast-changing market, this guarantees that supervisory remediation demands will feel stale by the time they are finally rendered. Indeed, because preliminary exam results are typically (and wisely) shared informally with bank management, and because bank management typically (and wisely) tries to respond to fix problems that are even informally raised, final exam reports can feel decidedly anachronistic by the time they finally emerge.

Notably, this type of supervisory machine puts a wet blanket on anything innovative or novel, resulting in a stagnant financial services landscape:

Today’s supervisory approach also encourages sclerosis in what otherwise should be a dynamic and innovative banking sector. Because the “management” component of the so-called CAMELS[5] ratings is so susceptible to inherently subjective criticism of internal processes and procedures, it becomes a useful tool to stand in the way of — or stonewall through a never-ending series of questions — virtually any bank customer or product strategy that might be novel or innovative or just disfavored, despite not presenting any non-trivial risk to safety and soundness.[6] As Lieutenant Columbo would have said, had he been at, say, the FDIC instead of the LAPD, “Just one more thing: I’m not telling you what to do as a business matter, but you need to revisit your second-line reviews of your first-line execution of documented procedures.”[7] Left unchecked, this can lead to a distressing monoculture of bank strategies, a particularly ironic tragedy for a nation that still has more than 5,000 banks and credit unions, and one that is a disservice to customers and businesses alike.

Yaka Stuff

#314—What a Trump administration means for digital assets

Also, the systemic problem with bank supervision

1. What a Trump administration means for digital asset policy

2. 18 states sue Gensler for “constitutional overreach”

3. How banks are oversupervised

4. Stuff happens

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