Cryptocurrency Regulation in the Aftermath of FTX

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The collapse of FTX has intensified the debate about how cryptocurrencies should be regulated, including proposed federal legislation. With a string of cryptocurrency failures and tens of billions in losses for investors, increased regulation has become a hot topic. As Bloomberg summarized: “Crypto is squarely in the cross hairs of Washington” and “Oversight of digital assets is among the most pressing issues for US financial watchdogs.”

Should cryptocurrency firms be regulated as banks? Should cryptocurrency assets be regulated as securities or as commodities? If so, who is the right regulator? Do we need new federal legislation? With enhanced financial and risk disclosures, should cryptocurrency firms only be subject to standard commercial law and, if they fail, normal bankruptcy proceedings? These issues will be addressed by this fourth in a continuing series of cryptocurrency webinars presented by the Federalist Society’s Financial Services and E-Commerce Practice Group.


The Honorable Cynthia Lummis, United States Senator, Wyoming 

Todd H. Baker, Managing Principal, Broadmoor Consulting, LLC

Jerry Loeser, Of Counsel, Winston & Strawn LLP (Retired)

Steve Lofchie, Partner, Financial Services, Fried Frank

Alex J. Pollock, Senior Fellow, Mises Institute

Moderator: J.C. Boggs, Partner, Government Advocacy and Public Policy, King & Spalding



To register, click the link above.



As always, the Federalist Society takes no position on particular legal or public policy issues; all expressions of opinion are those of the speaker.

Event Transcript



Sam Fendler:  Hello, and welcome to this Federalist Society virtual event. My name is Sam Fendler, and I'm an Assistant Director of Practice Groups with The Federalist Society. Today, we're excited to host Cryptocurrency Regulation in the Aftermath of FTX. Our program will begin with opening remarks from U.S. Senator Cynthia Lummis. Next, we will move into a panel discussion featuring Todd Baker, Jerry Loeser, Steve Lofchie, and Alex Pollock.


After our panelists give their opening remarks, we will turn to you, the audience, for questions. If you have a question, please enter it into the Q&A function at the bottom of your Zoom window and we'll do our best to answer as many questions as we can. Finally, I'll note that, as always, the expressions of opinion today are those of our guest speakers, not The Federalist Society.


And without further ado, I'd like to introduce our moderator today, Mr. J.C. Boggs. J.C. Boggs is a Partner in King & Spalding's Washington office where he leads the firm's FinTech, blockchain, and cryptocurrency practice. As former counsel to the Senate Banking Committee, J.C. represents financial services and technology companies before Congress and the executive branch and regularly interfaces with financial regulators on a wide array of policy- and institution-specific issues relating to financial technology and innovation. J.C., thank you very much for joining us today, and the floor is yours.


J.C. Boggs:  Thank you, Sam, and good afternoon to everybody. It's my pleasure to welcome you to today's panel on Cryptocurrency Regulation in the Aftermath of FTX. And we are extremely honored to be joined today by United States Senator Cynthia Lummis of Wyoming to help kick off the conversation. So, known to many of you already, Senator Lummis was sworn in the Senate in January 2001, becoming the first woman to serve as U.S. senator from the state of Wyoming.


Earlier in her career, Senator Lummis spent eight years as the Wyoming State Treasurer and fourteen years as a member of the Wyoming State House and Senate, and she was then elected to the U.S. House of Representatives in 2008. And maybe less well known, Senator Lummis started her legal career as a law clerk to the Wyoming Supreme Court and worked as general counsel to then-Wyoming Governor Jim Geringer.


But importantly for today's conversation, Senator Lummis is a member of the Senate Banking Committee, which has jurisdiction over digital assets, including cryptocurrency. And last year, Senator Lummis and her Democratic colleague, Senator Kirsten Gillibrand of New York, introduced the Responsible Financial Innovation Act, and that legislation proposes to create a complete regulatory framework for digital assets, which we look forward to hearing more about this afternoon.


Senator, thank you so much for making time to join us today, and we're delighted to have you here. I look forward to hearing about your bill.


Hon. Cynthia Lummis:  Well, thank you, J.C., and I want to thank The Federalist Society for hosting this program and letting me join you. As you all know, since 2009 when Satoshi Nakamoto put out his white paper that gave rise to bitcoin and the blockchain on which bitcoin exists, the explosion in technology in this area has just been transformative and continues to be transformative.


We've gone from bitcoin to the addition of other cryptocurrencies, up to the point where there are not just hundreds, but thousands of cryptocurrencies. Add to that stablecoins that are backed by fiat currency, talk of central bank digital currencies, and other products that are capable of being housed on the blockchain, and it's a very important area of legal practice for the nation's lawyers.


Certainly, we've seen how quickly the evolution of various firms offering custodial services, lending services, and other services have grown rapidly and become household names, even to Americans who don't even know what cryptocurrencies are. That said, that further led—because it's the regulatory Wild West—to the collapse of firms from Three Arrows to FTX, its affiliates, which has placed a tremendous burden on the bankruptcy courts and have led to calls for consumer protection, disclosure, and regulation.


Senator Gillibrand and I crafted a bill that we think found the sweet spot between allowing [inaudible 00:05:59], but by the same token, provides a regulatory framework that allows for both innovation and consumer protection through laying the cryptocurrency world on top of our existing financial framework.


So there's a role for the CFTC and the SEC as well as, in the stablecoin space, probably the OCC. So let's start with the CFTC. Of course, that would be where commodities would land. Everyone I've spoken to is in agreement that bitcoin is a commodity. It is sufficiently decentralized. It would meet the Howey Test that would push it over to the commodity side.


So that is something that's likely to go through the House and Senate Ag Committees sometime in the next two years. It's hard telling when that might happen because, even though that's the easiest component of this whole discussion, this is also a year when the five-year Farm Bill is up for reauthorization. So the Ag Committees will be distracted by their most important function, which is reauthorization of the Farm Bill.


Then, on the securities side of the Howey Test, most other cryptocurrencies will fall, and that puts a lot of smaller—smaller by market cap—cryptocurrencies under the jurisdiction of the SEC. And I think the vast majority of small cryptocurrencies probably do belong at the SEC. They are not sufficiently decentralized, and they offer—when the Howey Test is applied to them—more of the indices of a security. That will mean that it's important that we have a regulatory framework that's well understood because, right now, the SEC is regulating by enforcement action, which is not the ideal way for some of these firms to operate.


Now, I came to be interested in the subject because my home state of Wyoming was the first state in the United States to begin to craft a series of state laws to contemplate operation of firms in the space involving cryptocurrency. And if we applied Wyoming law to some of the activities of, for example, FTX, we would have found their structures and activities to be contrary to Wyoming law.


FTX was rehypothecating, lending the same assets over and over. They had created a product called FTT, and they had sold some of it to its affiliate Alameda, jacked up the price and the interest around FTT, selling it at ever-higher prices to investors, and then pulling the rug out from under it, thereby having FTT fail as a credible product.


Many of the activities of FTX were fraudulent, but what I'm worried about here in Congress and in the executive branch is, people are conflating digital assets with firms that are fraudulently engaged in businesses involving digital assets. That's why I think it's so important that something like the Lummis-Gillibrand Responsible Financial Innovation Bill passes.


So we have various components of that bill that could be separated out from each other, but Senator Gillibrand and I filed the Responsible Financial Innovation Act as one big piece so people could see how the interaction between the CFTC, the SEC, the OCC, as well as the various products, such as stablecoins, cryptocurrencies, central bank digital currencies, and NFTs, might look under a comprehensive regulatory regime.


Senator Gillibrand and I continue to work with the House Financial Services Committee, currently chaired by Patrick McHenry, as well as the House Ag Committee, currently chaired by G.T. Thompson of Pennsylvania, to try to see which legislative body wants to begin to move this legislation forward.


So a lot of education continues to go on in both the House and the Senate about these bills, and we could use the help of members of The Federalist Society who have thoughts about how this regulatory framework could best serve consumer protection as well as financial services related to the digital asset space.


So I'm so pleased to see that The Federalist Society is offering a panel today to explore some of those issues, and I thank you kindly for the opportunity to tee up your next distinguished panel.


J.C. Boggs:  Well, you've done a great job teeing it up, and I'm afraid you may have many takers on your offer to provide assistance and support for your legislative effort. Let me ask you real quick. I know the bill was introduced last year. I think it was in July. We have a new Congress, so we have to reintroduce the bill. I think we spoke about this in December in some outreach with the regulators and other folks to socialize the bill and see if there's any tweaks that need to be done, and maybe that's a continuing process to today, but do you anticipate reintroducing the bill at some point the next month or two?


Hon. Cynthia Lummis:  Exactly right. We're still in some communications with federal agencies. For example, Gary Gensler at the SEC had expressed some interest in having conversations about some of our definitions. He was concerned that some of our definitions might have unintended consequences, allowing certain existing assets to redefine themselves under our definitions and fall under a more relaxed framework than they currently have. And so, we want to entertain those discussions.


Obviously, it would be a real headwind for us if we're tangling with the SEC right off the bat with this piece of legislation, so we really want to try and iron out some of the issues that we can, but we anticipate that we will have completed that exercise within about the next month, and you will see the bill refiled.


Now, it was filed and landed in the Senate Finance Committee last year because there were multiple committees of jurisdiction, and when that happens in the Senate—and there's a small tax piece in this bill to address wash rules—it lands in the Finance Committee. I expect that to happen again, and so we've been having frequent conversations with both the Chair and the ranking Republican on Senate Finance, Ron Wyden and Mike Crapo.


But how it might get divvied up from there is anybody's guess. I would think stablecoins would fall under banking, that the CFTC would fall under ag, that the cybersecurity protections would fall under intelligence, that the wash rule would stay with finance. So we've tried to put the bill together in a way that allows it to be easily broken up and then reassembled as those various pieces pass.


J.C. Boggs:  That's very helpful. I got one more question if I can ask you. And you mentioned the role of the federal regulators, and that's what the bill is about and sort of saying, SEC, OCC, CFTC. This is what you would do and define certain instruments and products. But there's also, as you alluded to, a role for states, and Wyoming has been trying to be a leader in that area. It missed out the Wild West, or maybe it is or was, but trying to create a more friendly regulatory environment, I think, for innovation and technology and through different charters. And I just am curious. I think there's some litigation going on. What's the status, and is there some fit with what you're doing at the federal level?


Hon. Cynthia Lummis:  Well, it's just been an exercise in frustration with the Fed. Under Wyoming law, the banking division created a manual to evaluate firms that organize as special purpose depository institutions under Wyoming law, and it's a very comprehensive way to examine institutions that would organize under Wyoming's SPDI law. So a couple did, then they submitted for ABA bank routing numbers and master accounts to the Fed, and there is where they fell into the regulatory black hole.


A tremendous amount of time passed. There was a lot of finger-pointing at the Fed about whether the board needed to provide guidance to the Federal Reserve Bank of Kansas City or whether the Federal Reserve Bank of Kansas City had the authority on its own to grant a master account. And we could never get the buck to stop at the Fed to see who really was in a position to make that decision.


It became such an egregious amount of time that the Fed was sued, and then they finally, recently, chose to deny the master account just before discovery was due in the lawsuit. And then, I believe that the Fed has moved to dismiss the lawsuit. So the legal posture is enormously frustrating. Other similar institutions are having similarly frustrating times, so it's not just the Kansas City Fed; it's other branches as well.


So it's a hugely frustrating place to be, and it's important that the Fed be more transparent. And through this exercise, I know a number of U.S. senators, myself included, want to see FOIA applicable to the Fed, and we would like to see the regional precedents be subject to Senate confirmation because the Fed is a very non-transparent organization that's preventing economic activity. I don't think it's its goal or role to prohibit economic activity; I think that that is for policymakers.


J.C. Boggs:  Well, I think you might find some agreement here. Listen, I know you're a very busy United States Senator, lots to do. We really appreciate your generosity in speaking with us today, kicking this off, and really appreciate your leadership in the United States Senate on important issues. So thank you again.


Hon. Cynthia Lummis:  Thank you, J.C. We look forward to your input as well as we attempt to legislate in this area. Thank you to interested Federalist Society members for weighing in on this and helping us wade through this new technology and this new area of the law.


J.C. Boggs:  Thank you. Well, those are great remarks from Senator Lummis. Now I have the pleasure of welcoming our distinguished panelists in the order in which they will provide their observations and insights on the subject of cryptocurrency regulation.


So first, Jerry Loeser is an experienced banking regulation attorney who most recently served Of Counsel to Winston & Strawn. Prior to working in corporate law, Jerry was chief regulatory compliance counsel for Comerica Bank, where he was also a Senior VP, Deputy General Counsel, and General Counsel in the retail bank division.


And then, next up is Steve Lofchie, a Partner at Fried Frank's financial services practice. Steve provides both regulatory and transactional services to his clients on matters, including securities, commodities, commodity derivatives, and digital assets. Steve is also the founder and manager of Fried Frank's regulatory intelligence and acclaimed legal website.


And we will then be joined by Todd Baker. Todd's a senior fellow at the Richard Paul Richmond Center for Business, Law, and Public Policy at Columbia University. His research and writing focused on the intersection of FinTech and banking with a particular focus on the financial challenges of low-income working Americans. He previously served as Chief Corporate Strategy and Development Officer at three large domestic and international banks and as a corporate partner with the international law firms of Gibson, Dunn & Crutcher and Morrison & Forrester.


And last, but certainly not least, we will hear from Alex Pollock. Alex is a senior fellow at the Mises Institute. His research interests include financial crisis and their political responses, housing finance, central banking, financial regulation, and more. Alex previously served as the Principal Deputy Director of the Treasury Department's Office of Financial Research, a distinguished Senior Fellow with the R Street Institute, and a resident fellow at the American Enterprise Institute. I should note that Alex recently published yet another fascinating book, Surprised Again! - The COVID Crisis and the New Market Bubble, which you can find online or at your favorite neighborhood bookstore.


So, gentlemen, Jerry, let me turn to you first.


Jerry Loeser:  Thank you very much, J.C. Let me start with two quick brief disclaimers. As J.C. mentioned, I am a humble bank regulatory lawyer, not a crypto lawyer, and a retired bank regulatory lawyer at that. Second, I am assuming facts as reported in the media. I have no special knowledge about FTX or what happened, but when I read the initial news accounts of the FTX collapse, I considered them through the eyes of a bank regulatory lawyer, and I was shocked at what I read.


While in the final analysis, the FTX story may well boil down to simple garden-variety common law fraud, it could never have transpired had FTX been regulated like a bank is regulated. Coincidentally, I understand that the President's Working Group on cryptocurrency believes that bank regulation should apply to the cryptocurrency industry. So we thought it might be interesting to take a few minutes to walk through the FTX facts and the relevant banking regulations and to see how those would have applied in the FTX situation.


Okay. The facts as reported that I read: Number one, the financial statements of FTX and other crypto firms generally are not audited. Second, those financial statements generally are not publicly available and not available to the customers. Third, FTX allegedly lent billions of dollars of customer funds to an affiliate, Alameda Research. Fourth, FTX also further misused customer funds by spending them on political contributions, personal expenses such as for luxury real estate in the Bahamas, donations to nonprofits to curry favor with the public. Further, FTX had a board of directors, but the board of directors never met.


Alex also wanted me -- Alex Pollock wanted me to also touch on a recent bankruptcy judge ruling last month involving Celsius Network. The bankruptcy judge ruled that digital assets deposited by Celsius' customers with Celsius are assets of the bankruptcy estate, not customer [inaudible 00:24:53], which customers adhered to by simply clicking a button, so provided, which means that those customers are unsecured creditors of Celsius in the bankruptcy and will probably stand at the back of the line. And this, of course, could serve as a precedent for the FTX and BlockFi bankruptcies.


Let me turn to bank regulations and statutes and let you know what they provide in this area. First of all, banks are required by statute to have annual audits of their financial statements in accordance with GAAP. Second, bank financial statements are available to the public, at the minimum, on the FDIC website, and these are quarterly financial statements and are available from most banks upon request.


Third, banks are prohibited from lending to affiliates other than an arm's length -- on an arm's-length basis, subject to market terms and conditions. Further, the amount of loans to any single affiliate is capped at 10 percent of the bank's capital, and the aggregate amount of all loans to all affiliates of the bank are capped at 20 percent of the bank's capital. Further, each loan has to be fully secured, at least 100 percent of the loan amount, up to 130 percent of the loan amount, depending on the nature of the collateral.


Further, banks are regularly examined by regulatory agency bank examiners, who, among other things, ask to review the minutes of the board of director meetings and the committee meetings. And, of course, the bank regulators repeatedly expressed the hortatory expectation that bank directors, as is set forth in general corporate law, are ultimately responsible for the affairs of the bank.


Those examiners meet regularly with a board of directors to make sure they're fulfilling their duties and to apprise those directors of problems that the examiners have found after the banks. The directors are subject to removal by the regulators, they're subject to civil money penalties of up to more than a million dollars a day, and they're subject to potential personal liability for losses in the event the bank fails.


Finally, the banks are subject to comprehensive risk-based capital requirements, which ensure that, if the bank fails, there's a cushion from which creditors can be repaid. And, of course, deposits of the bank, customers are insured up to $250,000 by the FDIC, and the banks pay hefty deposit insurance premiums to the FDIC for that insurance.


So if you apply those regulations and statutes through the FTX fact situation, it would have meant -- and had FTX has been regulated like a bank, it would have had to have had audited financial statements. Those financial statements would have had been made available to the customers and the public. It could not have lent more than 10 percent of its capital to Alameda Research. Its board of directors would have had to meet regularly and attend to the affairs of the company or they would have been removed or fined.


Finally, FTX would have had a capital cushion against which a creditor claims would have been repaid, and the customers would have benefited from deposit insurance up to $250,000 per customer.


Now, in conclusion, I'm not suggesting that crypto should be regulated in the same manner as banks; however, that model has served banks and their customers and the country fairly well, and it would have protected the customers of FTX and the others. I yield back the balance of my eight minutes.


J.C. Boggs:  Terrific, Jerry. Thank you so much. We're going to move next to Steve Lofchie.


Steve Lofchie:  Hi. So I'm not sure I'm going to use my whole eight or take any of Jerry's, but I'll do my best to bore you for some length of time. So I'm going to pick up a little bit on what Jerry said. And many of the aspects of bank regulation that Jerry mentioned are actually true for any form of financial regulation.


We have capital oversight, custodial oversight, requirements as to the way in which financial institutions are supervised. So that's true whether it's bank regulation or whether it's securities regulation of broker dealers, or clearing houses, or on the commodity side, of futures commission merchants or swap dealers or clearing houses. They all have, I'm going to say, analogous frameworks to protect customers of those institutions and to monitor the capital of those institutions and to monitor what kinds of disclosure are made.


So the sum of that is that a reasonable scheme of regulation can be a good thing. I'm going to emphasize, though, the word "reasonable," and I will come back to that. But a reasonable scheme of regulation can be a good thing, and the elements of a reasonable scheme or regulation, actually not so different in many ways from banking law to securities law to commodities law: protect capital, have accounting systems, have a system of supervision, protect custody.


The unfortunate thing, I think, or one of the unfortunate things with digital assets, is that, instead of discussing what is the regulatory scheme that should apply -- and I think that will take a good bit of figuring out.  Instead of what the regulatory scheme is that should apply—How should we regulate capital? How should we regulate custody? What should be the elements of supervision?—instead, we're locked in a largely pointless and ongoing battle about who should have jurisdiction. Whether it is the SEC or the CFTC or the banking regulators, we're not getting to the heart of the matter, like, how should we regulate? All of the arguments are about who should regulate.


Now, right now, the entity that I will say has the kind of inside track, as even Senator Lummis kind of acknowledged, is the SEC, which has asserted that it has jurisdiction over pretty much all digital assets. And there's a problem with that. And, of course, as has been -- the SEC has been accused—and I think somewhat rightfully—of regulation by enforcement, but the truth is, that's actually not the SEC's main problem.


The SEC's main problem is not regulation by enforcement. Instead, its regulations really just don't work for digital assets. The system of disclosure that we have for ordinary corporate issuers does not work well for digital assets, for which there is no corporate issue, or the system of regulation of exchanges does not work well for the kinds of contracts through which digital assets trade.


So the fundamental problem that the SEC has, of course, is not regulation by enforcement. It's imposing or trying to impose a system of regulation that is not appropriate to the product. What the SEC would need to do if it really wanted to regulate digital assets is to rethink its rules of disclosure, rethink the way that digital assets trade, rethink the way digital assets are custody.


It's no secret that we need a disclosure system. We need custodial rules. We need capital and accounting rules, but they need to be rethought. If the SEC is not willing to do that, then we're stuck because the rules simply don't work as applied to digital assets.


So what I've personally proposed is that the creator of digital assets should actually be able to choose its own regulator, whether it's the SEC or the CFTC. I think each of them is perfectly capable of coming up with a regime that is functional. The SEC obviously already has a disclosure regime, though it's not one that, as I said, works for digital assets, but all of them regulate markets, or both of them regulate markets, and brokers and custody and capital. Each of them is capable of developing a regime that applies to digital assets.


The SEC, as I said, which has the inside path, has not done so. I think by giving issuers or creators of digital assets the opportunity to pick either regulation under the CFTC or regulation under the SEC, you would create some positive competitive pressure for each of the regulators to develop a workable regulatory scheme. And I think the -- I think the CFTC would be actually quite motivated to do so, and hopefully, that would drive the SEC to be motivated to do so, but I do believe that each of them is capable of coming up with a scheme.


Many of the elements that Jerry talked about in his discussion of banking regulation would be relevant, whichever regulator develops it, and they are already present in the regulatory schemes of the SEC and the CFTC. So I'm happy to take a break there, depending on how much time I have left.


J.C. Boggs:  Well, we're going to come back to you, but those are great observations, Steve. I appreciate that. I'm going to come back to that topic a little bit later on. Meantime, let's move on to Todd Baker, our next speaker. Todd, thanks so much.


Todd Baker:  Hi, thanks for inviting me, J.C., to talk here. As the only one here who's not sort of a D.C. denizen, it's probably not surprising that I have a contrarian view about all of this, which I've expressed, among other places, in the Wall Street Journal and some other media outlets. And to the extent you're interested in what I have to say today, I did a program last night at Columbia with Linda Jeng from the Crypto Council, Greg Baer from BPI, and Tim Massad, which you can watch to get a greater sense of the argument that I'm making.


So I think that we've gone down a rabbit hole here. You could hear it from the detail in Senator Lummis' comments and the rest of the conversation here about regulators and jurisdiction and whether the Howey Test applies, and all of that, and I think it's all based on a fundamental category error.


And the error that I see is that crypto trading in bitcoin and Dogecoin and Ethereum and all the other coins, and the various exchanges and brokers and hedge funds and whatnot who are trading crypto, essentially what your brother-in-law is doing when he tells you that he's dabbling in crypto, all of that isn't actually finance and shouldn't be treated by us as finance. So we're making a fundamental category error.


Now, why do I say that? So I'm a believer that finance has a purpose, and that purpose is largely taking savings and, through intermediation, turning them into productive investments, right? That's what banks do with deposits going into loans. That's what the securities market does by raising capital for businesses and government and distributing risk. It's all about a social and economic purpose, which is to save, transmit, and use money for economically useful ends. It's a bridge, and we're all familiar with this concept, which we see in all types of markets that we treat as financial services.


Now, these markets have a tendency to periodic excess, which we recognize and attempt to deal with largely through regulation, a very specific regulation that applies to financial services companies and not to other companies that, in one way or another, deal with money. And so, when I look at crypto trading, I do not believe that it, by its nature, can produce any economically or socially productive outcomes.


And I want to point out here again that we're talking about crypto trading, the kind of thing that FTX and Coinbase and others do, not about the blockchain in general or other applications of DeFi. You know, there are many ways in which the technology raises other issues, but crypto trading itself is really not about the technology. The issues we're having with it are not about the technology.


And so, crypto trading is what we refer to as an endogenous market. It's entirely internal. You're taking an intrinsically useless object, a crypto coin, which has no referent in the actual world. Sometimes it trades at a positive price. Sometimes it trades at a negative price. That's based entirely on belief rather than reflecting any interest in cash flows. You know, it performs no intermediation or transformation function, can't help expand the economy, doesn't build any roads, or won't deliver breakthroughs in financial services or healthcare.


As George Costanza in Seinfeld might say, it's finance about nothing. And my view is, because it doesn't serve any of those purposes that define finance and which justify financial regulation, we shouldn't treat it that way. So if it's not finance, the question is, "Well, what is it?"


And basically, my view is that it's an online game, an emulation of finance, a gambling game emulating finance. You know, the best analogy is probably one of those multiplayer esports competitions based on an emulation of a financial trading market instead of an athletic or gaming event.


Another way to think about it is, in the same way that Monopoly is about real estate or Risk is about war, crypto trading is about finance. Now, unlike Monopoly, it's an incredibly complex and dangerous game, born in the age of big data, and it deploys all the weapons of modern financial engineering—derivatives, options, synthetics, high-speed execution, etc.—and all the tricks of trading culture to increase risk and boost potential returns, but it operates essentially the same way that gambling does. They both enable transactions and create risk solely through the contractual exchange of bets rather than transactions that transfer the existing risk of economic profit or loss, which is the case with a securities investment or insurance contract.


You know, and in the same ways that gamblers bring fiat currency into a casino or, in an online gambling game, buy chips to wager on outcomes and convert the winnings or losings back into fiat currency, those playing the crypto trading game are seeking financial rewards entirely within the closed loop of the game with no referent to the real world.


So the crypto they buy really has no independent value outside of the game, the emulation market in which it trades. And one way to think about it is it merely serves as a necessary source of randomness to allow people to engage in gambling behavior. It's the dice, so to speak. And the type of finance it emulates is the type we really hate: the highly levered, extremely high-risk, opaque type of finance that creates financial crisis.


And why I'm very concerned about bringing it into finance and financial regulation is due to the fact that, in gambling markets, operators typically aren't interconnected. The entire market isn't put at risk if one of the players or a casino operator, for example, fails. If the Bellagio goes bust, its customers might suffer, but the risk of default doesn't extend to Caesars Palace. Danny Ocean and his 10 friends understood this concept well.


But the financial sector is fundamentally different. Its essence is interconnection. So if a financial firm or one of its customers makes a large enough wrong bet on a high-risk trading position, then the firm not only exposes itself, but its trading partners, its creditors, its contractual counterparties, other entities, and potentially the financial system itself. You know, that's the lesson we learned in 2008 but frequently forget until something like the London Whale or KeyGhost or Silvergate Bank comes along to remind us again.


And my concern is that, if crypto trading and the gambling game that essentially is crypto trading were integrated in traditional finance, the risk of systemic contagion would be real.  We'd have crypto coins in everybody's investment and retirement position. These are highly volatile by their nature, again, because there's no referent in the real world, and the essence of gambling is volatility of outcomes, and I'm quite sure that unexpected connections and end-leverage would show up at the wrong time and lead us into trouble.


And all of this is exacerbated by the stateless status of so much crypto trading, which FTX was an example of, but Binance, the biggest now-remaining player is totally the case because Binance doesn't have a place of business, is subject to no jurisdictions, laws, and no one knows where the CEO resides.


So none of this sounds like good policy to me, and so I have two suggestions of how to deal with it, one of which is going to perhaps please the libertarian parts of The Federalist Society and one of which probably won't. And there are kind of three ways to think about how to deal with it; the first way, which is what everyone in Washington, Senator Lummis, and everyone else, in good faith, are promoting, which is include it into the existing financial system, regulate it, control it, integrate it.


Everyone seems to think that makes sense because crypto trading wears the clothes of finance: brokers, exchanges, options, etc. And kind of what's going on here is, because we have a big hammer in the form of financial services regulation and there seems to be a problem, that means crypto must be a nail since it's the only way we can use the hammer to control it.


But my view is that, like kissing a wolf wearing your grandmother's nightgown, this really just enshrines this fundamental category error about what crypto trading is and puts it into law and policy in a way that really won't work out well for us in the long term.


Second alternative, China alternative, which is essentially ban the whole thing. Can't see that happening here. You know, we're gambling in many, many different ways around the country now. I don't know if you've seen what's going on with esports gambling. It's amazing, but no way that this type of gambling can be distinguished from other type of gambling enough to justify banning here. And, of course, there are many negative consequences to banning gambling, which we all are aware of.


And the third alternative—and might be the best—is really clearly separating crypto trading from traditional finance from the standpoint of both risk and regulation. So the crypto trading companies and their enablers should be separated as completely as possible from the traditional financial system, not included, as most of the proposals currently contemplate. Banks, brokerages, investment advisors, basically any regulated financial industry, in my view, should be prohibited from participating in supporting or adding leverage to crypto trading.


And this would obviously be a challenge, but the idea would be no crossover between crypto trading and traditional finance. While individuals can continue to play in both areas, institutions have to choose to be all in on crypto or all in on non-traditional finance. We don't want to have traditional finance supporting a shadow crypto trading system with distressed companies causing financial crises by having to liquidate their real-world assets to deal with lost bets in the crypto world. And we'd probably have to restrain affiliates as well since history has proven that it's very difficult to control that.


So obviously, individuals would continue to be able to put their money into the gambling emulation of crypto trading if they want to. And so, there'll be some bank involvement required, and ironically, this may provide a real good business case for fiat-based stablecoins as a connector.


But once you make that point of view, then all of this crypto trading should be excluded from financial services regulation: SEC, CFTC, OCC, CFPB. All the alphabet agencies who are jockeying for position here, this should just be off the table. It should be treated as a form of gambling.


J.C. Boggs:  I think I'm going to stop you there because, Todd, you packed a lot in.


Todd Baker:  Okay. That's fine.


J.C. Boggs:  We'll come back to you.


Todd Baker:  No, you got my point.


J.C. Boggs:  We did. That's great. And by the way, we welcome contrarian views here at The Federalist Society. We're a safe space for contrarian views, I would say.


Todd Baker:  That's good to hear.


J.C. Boggs:  And sometimes Alex Pollock has contrarian views. I'm not sure today, but look forward to hearing your remarks.


Alex Pollock:  Thank you very much J.C. Our colleague Steve has made what I guess is a really accurate prediction. No matter what the form of a regulation, maybe Todd's or somebody else's, Steve wrote, "We must conclude the necessity or inevitability of fulsome regulation. A market as big as that for digital assets and which is, to a significant extent retail, including the losses, are very significant in retail, will," Steve wrote, "be regulated."


Now, my comment thinking that is correct is not an endorsement of the policy, but it is certainly an endorsement of it as a prediction. As we know, the Wall Street Journal wrote in yesterday's page-one headline, "Regulators raised the heat on crypto's biggest players and the walls—that is, regulatory walls—are closing around crypto."


Now, there are lots of regulatory specifics being debated. We've heard a lot of them. We regulate cryptocurrency as a security, a commodity, a deposit, a gambling event, a currency, a payments product, or something else. Which regulators should do it? And, of course, in a federal republic, how much is federal and how much should be states?


As we observe all this conversation, it's ironic that cryptocurrency began as an attempt to escape government money and the government central bank's inflationary policies, but now we find the crypto firms and their lobbyists energetically trying to shape their growing entanglement with the government.


Especially for stablecoins, if you think of them as part of crypto -- as an important part of cryptocurrency, they have completely tied themselves to the government currency and are, therefore, completely tied to the inflation created by expansion of the government by printing of the government currency, and their purchasing power depreciation will automatically match that.


But I want to suggest that underneath all these specific questions are a range of fundamental views, or we might say schools about the evolution of cryptocurrency regulation. And I'm going to borrow here from a really good paper by Doug Elliott, a new one called The 2023 Key Political Issues in Finance. And he's very nicely, in my opinion, laid out four of these, which he calls dismissives, opponents, pragmatists, and supporters. I'm just going to restate his summary of each of these and then suggest a fifth general approach to which I subscribe called agnostics.


Now, starting with Doug's range of these various cryptos or the macro approach, he discusses dismissives in the following terms: "Perhaps 10 percent of policymakers believe cryptocurrencies will fade on their own as the speculative bubble continues to deflate. They oppose comprehensive regulation since they believe it would give cryptocurrencies an appearance of safety and government sponsorship."


On the extreme side, the [inaudible 00:51:50] side of this dismissive school, we have statements like this: "Instead of regulation, it's far better to do nothing and just let crypto burn," as Stephen Cecchetti and Kim Schoenholtz wrote, adding, "Actively intervening would convey undeserved legitimacy on a system that," as Todd also just argued, "does little to support real economic activity."


Now, the extreme opposite of that "let it burn" view would be the President's Working Group proposal mentioned by Jerry to treat stablecoins as deposits and add government insurance and taxpayer support. Well, you have to say that nothing could be further from the original philosophy of cryptocurrency, or nothing could be a more complete ideological surrender than accepting a government guarantee.


And this brings me to the second group, Elliott's opponents. "The opponents," he writes, "are a fairly large group that does not see social value in these crypto assets but doesn't think they will go away. Therefore, they're in favor of heavy restrictive regulation, ideally in a way that keeps them out of the traditional financial system."


Well, we've just heard Todd make a very interesting presentation of this opponent’s point of view. This view is also consistent with the current, what's been called "crypto clampdown" by the financial regulators. Now, this brings us to the pragmatists, "another large group," wrote Elliot, "that doesn't like these crypto assets either, but believes they are here to stay and will increasingly intertwine with the financial system. So what do you do? Their focus is on ensuring appropriate laws, regulations, and approaches to protect the financial system and its users."


And the fourth group that Elliott mentions are the supporters, and he thinks they're perhaps 10 percent of the policymakers. They see a parallel with dot coms in the 1990s; that is to say, a massive amount of leveraged speculation and fraud and very large losses for investors, but out of all that, something that turned into a massively important and beneficial economic innovation and transformation.


Another example of such a situation might be the building of railroads in the 19th century, which resulted in huge defaults and investor losses, but fundamental economic advance in the long term. So in this view, the so-called crypto winner would be useful washing out of the excesses reparatory to a new trend, and therefore, the supporters group proposes heavy-handed regulation.


So to quote Elliot's conclusion, "It will be interesting to see what balance is achieved between these different camps." And indeed, it will, and whatever actually happens will be heavily influenced by these macro points of views and underlying beliefs, or we could say predictions of what's going to happen with crypto, which, in fact, nobody can know. And this will lead us, in a minute, to the agnostic school.


Now, I do want to just say a word about disclosure, which Jerry very nicely and clearly discussed. The relevant ones seem to me -- the key relevant ones seem to me financial statements, as Jerry pointed out, which have to be audited and published in banks and other financial companies and are under are essential to understanding the risks and clear descriptions of the risks and the terms and conditions of the contract being entered into by the buyer.


All right. Now let me come to agnostics, the school to which I belong and built. They include two points made by the great philosopher economist Friedrich Hayek. One, it would be good to have competitive alternatives to government money, what he called denationalization of money, and I agree with this.


But personally, I doubt that any current cryptocurrencies can succeed at creating that competitive alternative to government currency, but I don't know this. And how do we find out? Well, as Hayek would say, we need a market. We need a market as a competitive discovery mechanism, but certainly a market with good disclosure, minimal fraud, and clear disclosure of terms and conditions.


As the Book of Proverbs says, "A just balance and scales belong to the Lord." In today's world, a just balances and scales are still important, but the financial just balances and scales are financial statements, full audited financial statements with clear disclosure, and then the market will decide whether cryptocurrency phenomenon is going to crash and burn, lots of failures—well, markets include failures—or whether it is going to come into a new phase and be a new success and survive with creating a new trend. 


All that is to be discovered in the market and in the views which believe they can predict what will happen. It seems to me we need to take more agnosticism into account that we don't know what will happen, but we do know, whatever is going to happen out of this market needs to have just balances and scales. Thanks a lot, J.C.


J.C. Boggs:  Alex, your timing is perfect. So we're going to go to the lightning round and get some thoughts, response from our initial observations. And Jerry, start with you.


Jerry Loeser:  Thank you, J.C. I just had a few quick thoughts. First of all, Alex mentioned that stablecoin is very similar to deposits. Bert Ely, who's a member of our Federalist Society committee, makes the point they are awfully close to being money market mutual funds, which, of course, are regulated by the SEC. So I'm not sure why stablecoins should not be regulated just like money market mutual funds at the SEC.


Steve's interesting point about permitting creators of digital assets to choose their own regulator reminds me back in the '70s when, a long time ago, I worked at the Federal Reserve Board, and our chairman was Arthur Burns. And when he talked about bank regulation, he noted you've got the Federal Reserve, the OCC, and the FDIC, and he cautioned against what they called a competition in laxity, in which regulators would compete with each other in order to be more lax than the others in order to attract regulatees. So when I hear Steve suggesting—and I respect Steve enormously—that, I think of that.


Finally, I do agree with Todd. A lot of the crypto trading really does seem to be like gambling, and when he mentions it should be separated from the financial system, I can't help but think of what Alex just referred to as a clampdown. Recently, the bank regulators really issued guidance on how banks should deal with crypto firms, and it has been compared to Operation Choke Point that they're going to prevent the financial system from dealing with crypto firms to the point that they'll choke them to death, and they'll be out of business.


J.C. Boggs:  Terrific, Jerry. How about we move back over to Steve?


Jerry Loeser:  Thanks.


Steve Lofchie:  Well, first thing I will say is, two things I am not ordinarily accused of is being either a gentleman or a D.C. denizen, so I would reject both of those characterizations. You know, as to the rest, first of all, I don't believe that crypto presents a systemic risk or one that cannot be controlled.


You know, the way in which capital is regulated at regulated institutions is within the control of the regulators. So, for example, with banks, they're not permitted to buy equities for speculation. Within the broker dealer regulatory system, broker dealers are required to take 100 percent capital charge for assets that are deemed illiquid. So there's a difference between allowing financial institutions to speculate or invest in an asset and allowing them to act as custodians or intermediaries.


And I think it is -- I mean, you can set up yet another Washington agency to regulate digital assets in particular. That seems, to me, wasteful, given the fact that, again, I think the basic elements of the regulatory system will be those that are common to the numerous regulatory agencies that we have, and I think those numerous regulatory agencies are capable of dealing with the systemic risk through capital regulation.


As far as the notion of competition, I understand the view that there can be competition to the bottom, but the truth is, right now, what we have is a single regulator, namely the SEC, which largely asserts regulation or authority over all digital assets but really has devised a regulatory scheme or refused to review its regulatory scheme to make it workable.


And so, the alternative to some degree of competition is having a single regulator that has not been willing to rethink its regulations as to how they might apply to digital assets. And I think that single choke point is as problematic or, I think, in this case, much more problematic than the possibility of regulatory competition. So with that, I will hand it over.


J.C. Boggs:  Okay. Todd.


Todd Baker:  Couple of quick points really tied to the Fed. One thing to understand about this crypto train thing is that it was a result, essentially, of the Fed's artificial low interest rate policy, a desire for yield assets in a world where there wasn't one for EVUP trading. And by the way, the numbers that are used for trading volumes, almost all false. The latest estimates is as least 40 percent of total crypto trading is just wash trades.


So the attempt to pump up the size of the market, which is really not so large, is something that's been going on along with the expenditure of probably more money than anyone has ever seen deployed in Washington over the last year and a half to come up with a proper and acceptable regulatory regime.


Second point is that—this also applies to stablecoins—higher interest rates, the stablecoin model doesn't work because if you hold stablecoins today now, you're giving up 3 or 4 percent of  interest because that money is going to the stablecoin issuer, not to you. And so, many of these phenomena which we've seen are really only a function of this extreme low interest rate environment, so it'd be interesting to see how many of them survive in a higher-rate environment.


And then back to the Fed again. You know, my main concern, and the reason I want to pull all of this out of the financial system and financial regulation is obviously systemic risk, but my main concern is I don't want the Fed at having to act as a lender of last resort to essentially socially useless crypto activity, whether it's in existing markets today or integrated into the more traditional markets.


So my concern is ever-expanding obligations of the Fed. I'm sure Alex has a lot to say about this to save activity, so I don't think they're going to fail. If they're in the financial services system, they're not going to be allowed to fail in size. And so, we're just essentially adding to the Fed's burden, and I don't think that's a good idea.


J.C. Boggs:  Well, that's a good segue to Alex.


Alex Pollock:  Thank you very much. I'm going to start off by saying I fully agree with Steve's point that we need to focus on the substance, not the jurisdiction. Of course, in Washington, you also have to settle the jurisdiction, Washington being about power as well as money, but I do want to point out time. I'm in Chicago, so I hope not to be totally captured [inaudible 01:06:04] point of view.


Also, Todd, let me say I really agree with the point on the Fed, the long period of zero interest rates, which resulted in the everything bubble. The everything bubble included cryptocurrencies, and that's the natural reaction of markets to not being able to get any return, any interest income on your investments. Walter Bagehot famously said, "John Bull can stand anything but he can't stand 2 percent." Well, if the savers can't stand 2 percent, they certainly can't stand zero without starting to do very risky things.


I want to mention that, when we talk about innovation, and innovation in FinTech in general, there certainly is innovation, and a lot of innovation, in the tech part, but being a student of centuries of financial foibles, I doubt a lot there's really much innovation in the fin—that is to say, the financial part of FinTech—and I think it's good to keep those two elements separate in our minds.


And finally, to the question of, "Do we learn the lessons of the last problems?" my answer to that is, yes, we learn the lessons every time, and then it takes roughly 10 years to forget them.


J.C. Boggs:  So Alex, you talk about financial innovation. And our timing is great. There was a hearing yesterday. I don't know if you all caught it, but the Senate Banking Committee had a hearing called Crypto Crash: Why Financial System Safeguards are Needed for Digital Assets, so basically the same topic we have today.


And just to maybe oversimplify a little bit, you had a breakdown of sort of Democrats on one side. Sherry Brown, the chairman, and Elizabeth Warren said, "We need more regulation." And on the other side, there's recognition that there was some problems with FTX—We get to deal with that—but that, as Tim Scott said, "If we foreclose financial innovation, we limit future generations from growth and opportunity." He said, "Well, I consider this massive failure. I wonder, where were our regulators when they supposedly already had these authorities?"


So I guess the question I'll throw out to all of you: Are we seeing too much regulation or not enough, or perhaps not the right kind of regulation? So back to Steve's point, it's maybe focusing too much on who's regulating, but how should we regulate, and do we need new laws or can we apply existing banking laws or legacy financial regulation to digital assets? I know we already have prohibitions on conflicts of interest and self-dealing. I don't know who wants to take that first.


Jerry Loeser:  You know, let me just start. And this is definitely not responsive to what you're asking, J.C., but you were nice enough to circulate that hearing, the tape of that hearing, and I did watch part of it. And one of the witnesses made a very interesting point that we have not made in this panel, and that is, when we talk about innovation, oh, gosh, we can't stand in the way of innovation with digital assets.


And he made the point, when the cell phone was invented or something, it took like two or three years before everybody in America had one. When the internet was invented, it took two or three years before everyone was using it. And then, he made the point that, in 2009. Mr. Satoshi—yes—came up with bitcoin and it still hasn't caught on in 12 or 13 years since it's been around, so maybe the innovation in the digital asset area is not the same as the innovation that there's been in other technology space; that is, it hasn't been a --


Alex Pollock:  Well, this is -- J.C., first of all, you posed a series of eternal questions, and each crisis shows, many times, that what was a very well-intentioned regulation turns out to have made the problems worse. That's certainly possible.


And secondly, Jerry, I'd say bitcoin has proved not at all to succeed in its original intent—that is to say, creating a currency—but instead has succeeded very well and has been very widely adopted as an object of speculation, or you can say gambling, Todd.


Any of these experiences in bubble markets have a very strong brother-in-law effect, which is that you can't stand it when your brother-in-law is telling you at the family dinner how much money he's making, say, on bitcoin or cryptocurrency, and that is the most -- that is the most disconcerting and upsetting of one's emotional balance, the saying is, seeing your brother-in-law get rich.


Steve Lofchie:  There should be a German word for that. So I think where Bitcoin has succeeded is being an instigator of change and of development. And this is where the government should not be kind of announcing that something doesn't work and no one should do it. You know, I think it's very likely correct that bitcoin does not become an exchange currency, but it has given rise to all kinds of -- well, it's given rise to new technology, which is very likely revolutionizing payment and settlement systems.


And so, I'm uncomfortable with general position "digital bad, doesn't work." It's really the allowing it to be traded that has created all of these new possibilities. Now, as for the notion that stable coin is worthless because it doesn't pay interest, I certainly get it that, in a high interest rate environment, you're going to hold less stablecoin than you might in a low interest rate environment, but you can still hold a limited amount of stablecoin, and it might still be useful even in a high interest rate environment because it can be a good way to pay bills, for example.


There's also no -- And let's divide stablecoin into -- Some people use the term sort of broadly. We have stablecoin backed by fiat, which I think can still be useful, as I said, even in small amounts and in a high interest rate environment for making payments, but you also have what are really money market funds where it's stablecoins backed by securities.


Again, there's no real reason why a money market fund represented by a digital token isn't a perfectly worthwhile financial tool, and I actually think it's unfortunate that the SEC has not, to date, kind of permitted the launch of a money market fund regulated by the SEC and represented by tokens and easy to trade. I think that would be a worthwhile financial tool, and I think it's an example of a financial use where the SEC has really held up innovation.


Todd Baker:  I'll agree and disagree with you, Steve. I think you're absolutely right that there's nothing wrong with stablecoins as a vehicle payment. They're quite distinct from other types of crypto that we've been talking about. You know, unfortunately, the major use of them right now is servicing the crypto trading ecosystem, but they could possibly be used for, the usual argument is international transfers, and that's true.


The interest rate challenge is, there's no business model for stablecoins that works except at massive size, right? And so, to the extent that people are using it solely as a limited payments vehicle and moving money in and out, there's no business model that works for that. So that is probably a non-starter.


On the other hand, I agree with you in that much of what's been going on here, particularly in stablecoins, has pushed the issue that the banks have been abusing their situation in international transfers for a long, long time and that, basically, the competition, or the potential competition that stablecoins bring, is, I think, going to bring real-time payments faster, and it's going to bring down costs. There's already a number of FinTechs who've brought down foreign exchange costs.


So even if stablecoin doesn't establish itself as a second set of rails that has independent strength and can revive, it will press the traditional industry to lower costs and improve speed and do a lot of other things. And I think what you said is absolutely right. Much of the other innovation is likely to result in increased digitization, even in traditional areas, and all that is probably good.


Alex Pollock:  That, Todd, is really the stablecoin as a payments system, but for a stablecoin to work like a money market fund, it has to pay an interest rate or return, right?


Todd Baker:  Right.


Alex Pollock:  And if it's an interest rate, then either it's a security or it's a deposit. Yeah, and either way, you get a lot of regulations along the way.


Todd Baker:  And that's why Circle is making money now for the first time because it's holding all that interest because it can't pay it out, right?


Alex Pollock:  Right.


J.C. Boggs:  I want to bring back one of the audience questions we got early on, and it may be in a more circuitous route that he intended, or she intended, but we started unpack this technology, this crypto. It's not monolithic. It's different things. So you have sort of the exchange currency or stablecoin, you have more of a speculative asset, and then, you have the CBDC, which is what you want to talk about.


But I'm wondering if we are sort of Back to the Future in some way where we've seen this movie before. We had, certainly not digital currencies back in the 1800s, but I think we've had about 6000 private currencies starting the late 1700s with Vermont copper all the way through 1850 or so, National Bank Act. So you had different municipalities and states and railroads create their own private currency. And how did that end, or are there similarities?


So you have that -- That was used for exchange, a speculative piece, but then you have what is basically a fiat currency. It's maybe an oxymoron. You have a decentralized or distributed ledger technology that you're now centralizing by the central bank to have it government backed, a CBDC, as we call it. So I don't know if that was a question in there somewhere, but the question we have from the audience is, what are we thinking about CBDC?


Alex Pollock:  On your point, J.C., certainly the equivalent, you might think of a stablecoin, were included national bank notes under the national banking system, and those lasted up to the 1930s, even when the Fed got a pure monopoly on currency, and that's the same idea. If you can get people to hold non-interest-bearing liabilities and invest them in interest-bearing assets, why, you can make money as long as interest rates are positive.


On a CBDC, that is an extension of the cryptocurrency ID of the most ironic kind; that is to say, a system set up to achieve complete independence from government currency and from central banks can potentially turn into a government cryptocurrency or a so-called central bank digital currency, which vastly increases the power of very people you started off trying to sidestep. It's a huge, wonderful historical irony.


And in my opinion, CBDCs are probably the worst financial idea of the last decade or so and have not only tremendous financial distortions to offer—that is to say, making the Federal Reserve or any central bank to, in effect, a government lending bank, which politicizes lending and is always a disaster. And secondly, it presents terrific potential and which I believe would be actualized problems of allowing the government to spy into every financial transaction you make.


J.C. Boggs:  Well, I get why China would be interested in it, but why the U.S.?  And maybe Todd, you have a contrary viewpoint?


Todd Baker:  Yeah. So it's a confusion here. And I 100 percent agree with Alex, what he's saying about the concept of a direct digital currency. But the odd thing, people think that's what people are talking about when they're talking about CBDC, but in most countries, they're actually talking about an indirect digital currency that goes through the banking system, which wouldn't raise most of those issues. But people continue to believe that we're talking about direct issuance, which has all the problems that Alex talks about there.


More likely, what we're going to end up with is a better -- We already have digital money between the banks, right? It's not like it's something new at banks and the Fed. You know, we'll probably get an enhanced version of that and potentially digitize deposits and other things, but will it be working on a blockchain? No. And is it what people think they're talking about when they talk about central bank digital currency? Probably not. So I just don't see it happening. And if it goes in Alex's direction, I'll jump in front of the train right next to him.


Alex Pollock:  I will be delighted to have your good company, Todd. I don't think there's so much there -- I'm well aware of the difference you referred to. I'm personally more -- First of all, I'm glad we agree on the direct digital currency, and I think that's completely clear. I do not believe that the indirect approach will succeed in avoiding the problems.


Todd Baker:  Oh, good. That's bad actually.


Alex Pollock:  Yeah.


J.C. Boggs:  Well, I'm going to -- One of our favorite SEC commissioners, Hester Peirce, said that regulation should foster an environment where good things flourish and bad things perish, not the other way around. So many of the 2022 failures, in her words, involved crypto market participants doing the same foolish and fraudulent things that participants in other markets have been doing for centuries. So I ask you, do you agree or disagree?


Alex Pollock:  I agree. I sign up Hester, who is very thoughtful and good, as you know, a confirmed member of the agnostic school of cryptocurrency basic view.


Steve Lofchie:  Yes, I agree with pretty much everything Hester says, and she is far and away the most thoughtful, courageous, and funniest regulator in Washington. So human nature doesn't change.


Todd Baker:  It's sort of TechFin versus FinTech, right? So what we're getting is a reproduction of all the historical errors that have ever been made in finance because of these tech guys who were entering finance rather fin guys who were entering tech.


Alex Pollock:  You know, Todd, there's another thing we completely agree on.


J.C. Boggs:  There's too much agreement here. We need to get [inaudible 01:23:18] to get diverse viewpoints. Okay, quick question, too. So is the digital asset industry going away, or is it here to stay?


Alex Pollock:  I'm agnostic.


J.C. Boggs:  Agnostic.


Alex Pollock:  You want a market -- you want a market to decide that.


Jerry Loeser:  And I've got to repeat what I said a couple minutes ago, and that is, the bank regulators recently issued this guidance to all of their banks essentially to say, stay out of crypto. Don't bank crypto. There's risk left and right if you do, on not just lending but if you take deposits, as -- I think Silvergate is the name of the bank has huge run on deposits when one of its crypto clients had to withdraw the money, creates liquidity problems. I worry, and people are saying it's going to choke the crypto industry to death. It's like Operation Choke Point, what's happened.


J.C. Boggs:  We had a bunch of new questions came in here, which we're going to have to extend this for another hour or two, if that's okay with you all. But I have good news on that front. So one month from today, on March 15, we have cryptocurrency regulation round two. We're going to be joined by Congressman French Hill in the U.S. House of Representatives, a senior member of the House Financial Services Committee and now the chairman of the Digital Assets Subcommittee. So that's March 15, exactly one month from today—Ides of March—I think at 3 p.m. as well, so be sure to tune into that.


I want to thank -- And this really did go all too fast. Senator Lummis did a great job kicking this conversation off. And Todd, Jerry, Steve, and Alex, it's always a pleasure. This has been a great discussion. I wish it didn't have to end so soon. I hope our audience enjoyed it. But again, there's more to come in one month. So, give you two minutes back and thank everybody.


Steve Lofchie:  Thank you.


Todd Baker:  Thanks, J.C.


Alex Pollock:  Thanks.


Sam Fendler:  Excellent. Thank you very much, J.C. And on behalf of The Federalist Society, I want to thank Senator Lummis. I want to thank our panelists and, of course, our great moderator for the benefit of their time and expertise today, but thank you also to the audience for joining us. We greatly appreciate your participation.



Please check out our website,, or follow us on all major social media platforms @fedsoc to stay up to date with announcements and upcoming webinars. With that, thank you once more for tuning in, and we are adjourned.