Rep. Warren Davidson: ‘I Think Bitcoin Is a Great Store of Value’

U.S. House Representative, Warren Davidson, contextualizes the state of crypto legislation in terms of widespread civil unrest, COVID-19, and global shifts in power. He explains where crypto plays a role in these paradigm shifts and talks about:

• Why he believes in crypto, and how he came into the space
• How his Token Taxonomy Act creates regulatory clarity for token issuers
• What four conditions tokens would have to meet to not be considered securities
• Other features of the Token Taxonomy Act, including a de minimus exemption for taxes and no taxation of crypto-to-crypto trades
• How the pandemic and coronavirus-related fiscal stimulus affects the prospects for the Token Taxonomy Act
• What he thinks about China’s blockchain push and its DCEP digital yuan
• Whether and how that creates a credible threat to US dominance in global markets
• Whether Libra could be a counterweight
• How a shift toward digital currencies could undermine the global reserve status of the USD and whether that affects the US’s ability to enforce sanctions
• How outcomes of the upcoming election will affect the potential passage of crypto-friendly regulation
• Why it is easier for crypto legislation to be more bi-partisan than other bills  
• What help he needs from the industry right now to push along crypto-friendly bills

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Episode links: 

Rep. Warren Davidson: https://twitter.com/WarrenDavidson

His House page: https://davidson.house.gov

Press release on the Token Taxonomy Act: https://davidson.house.gov/media-center/press-releases/token-taxonomy-act-address-blockchain-innovation-flight-america

Token Taxonomy Act on GovTrack: https://www.govtrack.us/congress/bills/116/hr2144

Text of the Token Taxonomy Act: https://www.govtrack.us/congress/bills/116/hr2144/text

Letter requesting IRS clarify some crypto tax policies: https://www.coindesk.com/us-lawmakers-ask-irs-to-clarify-crypto-tax-rules-around-airdrops-forks-in-new-letter

Congressman Patrick McHenry on Unchained discussing his “permanent beta testing” idea for crypto: https://unchainedpodcast.com/congressman-patrick-mchenry-bitcoin-will-be-of-enormous-value/

Unchained interview on the DCEP: https://unchainedpodcast.com/why-china-aims-to-replace-cash-with-the-digital-yuan/

Unchained interview with Libra co-creator Christian Catalini: https://unchainedpodcast.com/a-libra-co-creator-on-how-facebook-will-make-money-from-calibra/

Unchained with Christopher Giancarlo on his proposal for a digital dollar: https://unchainedpodcast.com/christopher-giancarlo-on-the-craziness-of-becoming-crypto-dad/

Secretary Steve Mnuchin on Libra and a digital dollar: https://www.bloomberg.com/news/articles/2019-12-05/mnuchin-powell-see-no-need-for-fed-to-issue-digital-currency

Video in which Rep. Davidson says “shitcoin”: https://www.coindesk.com/lawmakers-amp-up-pressure-on-facebook-to-halt-libra-cryptocurrency-development

Meltem Demirors and Jill Carlson on the Shitcoin Waterfall on Unchained: https://unchainedpodcast.com/meltem-demirors-and-jill-carlson-on-the-shitcoin-waterfall-ep-74/

Transcript: 

Laura Shin:

Hi, everyone. Welcome to Unchained, your no hype resource for all things crypto. I’m your host Laura Shin. I have a little bit of news. We are now doing video recordings of the podcasts. If you’re tuning in via the podcast but want to see me and my guest congressman Warren Davidson in the flesh be sure to go to youtube.com/c/Unchainedpodcast, again that’s youtube.com/c/Unchainedpodcast. Subscribe today. 

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Laura Shin:

Today’s guest is US representative Warren Davidson of Ohio. Welcome, Congressman Davidson.

Warren Davidson: 

Good to talk with you, Laura.

Laura Shin:

Your background is a mix of military and MPA and owning and operating manufacturing Companies. How did you come to be a congressman and also get into Bitcoin?

Warren Davidson:  

Yeah so, I guess, how did I become a congressman? John Boehner was the member of  Congress that represented my district and of course he was also the Speaker of the House, so when he resigned, I wasn’t planning to run for Congress. At that time I owned a group of manufacturing companies, and so he resigned in September of ’15. Initially, there were a couple of people running against him but then all your more credible candidates get in right away after he announced it, and in October you start getting invitations to fundraisers, and in November a couple of people stopped in my office, really to raise money for another cause, and they said it’d be great…they asked who I was going to back in the race and I said, well you guys are the political people, and they said it’d be great if there was an Army Ranger business guy in the race, and I came home and I thought my wife would laugh kinda like you did, because that was my reaction and she said, well what’d you tell them? I said, well, I told them they’re crazy because it’s crazy and she says, call them back you’d be great at that, and ultimately I did and won the race, so that’s how I came to be in Congress, but I took an interest in Bitcoin early on because in manufacturing we had a lot of international payments and it has all the payment system problems that people recognize, that would be watching or listening to this podcast, and so you would wire transfer money and it was early on. It was really clunky because you couldn’t wire direct to China, for example, so you’d go through Hong Kong. It was very inefficient and that led to an interest in things like DigiCash, and other things, so when Bitcoin came on the scene you say oh, this really is a pretty elegant solution, pretty neat idea.

Laura Shin:

Wow. Okay, so you were really following this stuff even before if you knew about DigiCash.

Warren Davidson: 

Yeah. Unfortunately not as a Silicon Valley investor just as a manufacturing guy trying to solve a problem here in the Midwest.

Laura Shin:

Right, and I just want to say for listeners who don’t remember, we’re both from the same state, Ohio. Great state. So, we had tried to do this interview back in December and due to technical issues we couldn’t finish it and what was interesting is this time around, when I went to prepare, everything in the world had changed so drastically that some of the questions not only seemed outdated but almost quaint and I still feel like we need to dive into that background so people understand kind of what it is that you’ve been working on in crypto and blockchain pre-pandemic, so why don’t we just kind of cover that ground now.

So, in April 2019 you introduced the Token Taxonomy Act in the house. What problems were you trying to solve with that bill and what are the main points that it proposes?

Warren Davidson: 

Yeah, so the bill itself really was a product of work done in 2018, so like I covered, I got into Congress and then ultimately on the Financial Services Committee. People will remember in that stretch, 2017 in particular, the ICO market was really hot and Congress really wasn’t doing anything about it. There were regulatory turf wars and you know court cases that were coming out providing a patchwork, and normally that’s a great time for Congress to come in and provide some sort of clarity, what should the law be, and we couldn’t get momentum on that so 2018 was coming around and we couldn’t get that, so as a junior member of Congress I can’t really hold a hearing but I can hold a meeting so I decided to hold a meeting, and in September of 1’8 we had this roundtable. It was initially like, let’s get a dozen or so people in this space, thought leaders and it turned into, oh, well these people are coming. Well. Let’s send our CEO or general counsel, and then that led to bigger firms and more credible firms in the space and…

Laura Shin:

And I think you were saying some of them were Fidelity, State Street, a16z. Can you list some of the others?

Warren Davidson: 

Andreessen Horwitz and small firms, early-stage startups like 10XTS, an Ohio company, and Filecoin was there from Consensus, so many of the use cases that you would look at and big names in the space, but yeah, things like Fidelity, State Street, NASDAQ, good representation to be part of it and that drew a great piece. So, we really went there to listen not necessarily to say, here’s exactly what should be done, but the bill that we drafted afterward became a nonpartisan bill, people across the political spectrum, and kind of wrapping up it kind of summed up to say, this isn’t really a partisan issue it’s whether you actually understand the issue or not because people from across the political spectrum would agree this is what this space needs to have innovation flourish in the United States. 

So, we dropped a bill at the end of 2018 that was really meant to be a public way to get feedback on what we had…our work product from that Roundtable and so we thought, oh well, we’ll be able to get feedback and drop this in February but we truly had feedback, I mean just in an abundance of input from great law schools, venture capital firms, trading desks, startup companies, entrepreneurs, you name it, so we had all this input coming and it took really until mid-March before we kind of gelled all that in a way that we could get it redrafted. So, it’s been there and we’ve got a nice file of things that if we do get to the point where we go through true hearings and then markups where amendments could be offered we would probably edit the text some to get full consensus to move across the finish line but we’re not yet there it, and we thought we had a lot of momentum initially because of Libra, which at the time we were doing this wasn’t yet…if it was conceived it wasn’t yet public that it was conceived, so when Libra got a lot of awareness for this space, unfortunately, it made the whole topic almost about Facebook and less about the underlying tech, and it’s kind of been in between the two. 

People are worried about the technology or the Facebook type issues not really dealing with the regulatory clarity that we need in the meantime. So, if Congress had to try to understand the seven-layer security protocol of the internet we would’ve never got the Telecommunication Act in the 1990s. Thankfully they just said, you know, we’re pretty sure this is gonna be a thing. We should kind of get out of the way and let some innovation happen, so we’re really pushing for that kind of minimal light-touch regulatory clarity that the United States needs, and frankly as the people that are listening to this podcast, or now watching, know that capital is fleeing the United States, not really to 

avoid our laws but to find regulatory certainty that has been accomplished in places like Switzerland and Singapore. 

Laura Shin:

And in terms of the clarity that you wanted to offer what that act it looks like one of them was that you would propose…or the act would propose that digital tokens would be excluded from the definition of a security. Does that mean that if it were to pass that  holding an initial coin offering would be legal?

Warren Davidson: 

Well. I mean, an initial coin offering could be legal today if you complied with Reggae or Reggae Plus Part D. There are a number of crowdsourcing. There’s a number of ways to do an initial coin offering that would be fully compliant with securities law. The trouble is that if you want to make a coin, in the sense of a tokenized asset, functional if it’s treated as a security then it, for most use cases, becomes problematic because you’re essentially engaging in broker-dealer activity and it fundamentally changes what a lot of firms are trying to do with the space. So, it says that if you meet this four-part test then you could have regulatory clarity that this will not be considered a security, and that’s really been the hang-up at the SEC, the Securities and Exchange Commission, and it goes back to a 1950s court case, the Howey Test, which is really about oranges versus orange groves, and the capital formation, and is it created yet or not, so it doesn’t say all tokens will be not securities but it says if you meet this test then you’ll know it’s not a security because you could tokenize securities.

Laura Shin:

And what are the four conditions?

Warren Davidson: 

Yeah, so one, it’s already created so not just proposed, so it exists.

Laura Shin:

Like the network is live.

Warren Davidson: 

Right. So, it’s functional, and then two is that it’s on a distributed ledger that doesn’t require a third party to transfer assets so you don’t need an intermediary, so that…we started talking about him initially as open blockchain tokens but then we said, well, there are people that are doing things that are very similar that would probably meet the same test and it wouldn’t necessarily be on a true distributed ledger or blockchain technology, but clearly a distributed ledger, which people watching this would be familiar with, complies versus a centralized database. 

Laura Shin:

So essentially, that means that a private blockchain run by a consortium would not qualify, their project would not qualify. Is that…

Warren Davidson: 

Well. It wouldn’t necessarily meet this test because there’s a bigger debate about that, and the other piece is the central authority, which is you know part three, central authority can’t alter it, so this would…for example, the proposal for Libra wouldn’t pass this test because even though it’s a non-profit they have a central authority that could, in theory, change the composition of the basket of currencies or even short-term securities that we’re talking about, when inherently if you’re trading short-term securities to create the value of the asset then the underlying product will be a security, so that’s three, and then the fourth part is that it doesn’t represent an entity, so for example, I like pointing out Filecoin, and some people may be familiar with that use case, but think of Apple. If the wanted to launch CloudCoin and the token was representative of a terabyte 

of storage on iCloud it would be very clear that you’re not buying shares of Apple, right. You’re buying storage, a service or good, so it’s the representation of the asset can’t be shares of a company, otherwise, there’s just be a big circle to say, well gee, this is a share but it’s not treated as a share, so you can’t represent that, and then that’s the four-part test so even if the SEC really, really doesn’t like your use case they still can’t say that it’s a security unless…you know, mortgages aren’t securities either but you can bundle them in a way that they are now securitized, so somebody could do that to tokens down the road to kind of, I guess, highlight how far into the weeds you can get with these definitions, but it’s really important. So, that’s one of the important things that it does.

Another big thing is custody is a big issue, so how can you give custody to somebody while retaining the private keys, and in theory, you could give those keys to someone else, so it creates a standard for that, and then I think lastly…and a couple of other things. The last big important thing is the De Minimis tax exemption, and while we’d like to go bigger on that the safe thing is to just treat it the same way you would treat existing currency, and the downside is that conflates all of these tokenized assets that could be represented by a digital token with currency, and the reality is many of the use cases have nothing to do with currency but the language that formed in the early days of this space it’s all about currency, and some of my colleagues can’t get over that. Well, you’re just trying to create a rival to the dollar and destroy the value of the dollar. There are some that are aspirational in that sense, of what they hope the space can do, but many of the…it’s like the Internet.

I mean, we haven’t even remotely tapped all the use cases for the Internet, so you’re clearly in the infancy of use cases for blockchain technology and tokenized assets so I’d rather use something else, but because of that confusion…you know, if you go to Europe and you’re going to go, say, initially to London and you need pounds, and then you’re going to need euros. As long as the net is less than 600 dollars you don’t end up having to pay taxes, and so that same De Minimis exception would apply here for tokens.

Laura Shin:

Yeah, So, first of all, the taxation issue is such a huge one for the listeners of this show and just really a lot of people that are involved in the crypto space, and one other thing I wanted to point out is it’s so clear that you have a very nuanced understanding of this because just even what you were saying about how just because they come…these different assets can come in this blockchain wrapper, it doesn’t make them all currencies. I mean, it’s an obvious thing and hopefully, someday regulation can address crypto assets in that way, but you’re right. At the moment I think you are one of the select few lawmakers who does have that deep understanding of the space. 

So, one other thing that I wanted to bring up was just a few other aspects about the taxation. One is that it looks to me also like there are certain IRAs in virtual currencies where distributions would not be taxed, which it sounds to me like if you put Bitcoin into an IRA then you don’t pay taxes when you withdraw that money. Is that correct?

Warren Davidson: 

Well. It depends on the kind of IRA, so it would really have nothing to do with the underlying asset, in my opinion, initially. I mean, I’m not a lawyer in this space or an accountant, but you have a Roth IRA and a traditional IRA so the money that you put in a traditional IRA is tax-deferred and you don’t pay taxes till the end and the money that you put in a Roth is money that’s already been taxed and so they’re treated differently.

Laura Shin:

Okay.  Yeah, and one other one that caught my attention was a tax exemption for exchanges of virtual currency, which made it sound like crypto to crypto exchanges would be tax-free, which I think would excite a lot of the traders in the community.

Warren Davidson: 

Yeah, I think that…

Laura Shin:

Is that correct?

Warren Davidson: 

That’s right. If you think about real estate people…it’s still…it’s like section 1031, but you’ll talk about a 1031 exchange and it really treats it as an asset, and when you do a like-kind exchange then you can net out the tax. The easy case is if you’re, say, taking you know a hundred thousand dollars or a million dollars and you’re buying something that’s two hundred thousand dollars or two million you can roll that in. You still end up with issues when you’re going down the ladder, in terms of paying out of net gain, because it’s a net issue but it still could minimize it. Generally, it’s done when you’re taking something of value and exchanging it for something more and putting some 

additional equity or leverage into the deal.

Laura Shin:

And then one last piece of this is this…what you proposed intersects with what SEC Commissioner Hester Peirce proposed, in terms of her suggestion that there be a safe harbor for token issuers, and I was curious to know what your opinion was of her proposal.

Warren Davidson: 

I think Hester Peirce and I are nearly 100% aligned in this space, so I think she would make an excellent SEC commissioner.

Laura Shin:

Okay. Great. Well.

Warren Davidson: 

Chairman. She’s already on the board. I think she would be a great chair.

Laura Shin:

I feel like it’s pretty rare to get such a strong opinion from a politician, so I take it that’s something you feel strongly about. Okay, so now we’ve kind of gotten through most of that pre-pandemic background, but actually, one last piece is before all of that, like at the time this past winter when we thought we were gonna do this the first time, what is…what was the status of the token taxonomy, actually, at that time, like how likely did you think it was to be passed in 2020 back in the winter?

Warren Davidson: 

Yeah, I think that the coalition is not partisan, so we have a wide range of folks. Unfortunately, some of the chairmen of the committee changed and so clearly the most vocal opponent of this space in congress is Brad Sherman, and Brad Sherman’s a democrat from Los Angeles and now he is the chairman of the Capital Markets 

Subcommittee, so near the end of the year after Elijah Cummings died Carolyn Maloney moved out of our committee’s chairmanship for that subcommittee and became chairwoman of the House Oversight Committee so that created the opening and Brad Sherman’s the most senior Democrat, so he became in that subcommittee, so he became the chairman of the Capital Markets Subcommittee, so…

Laura Shin:

And he famously, also, proposed outlawing cryptocurrency.

Warren Davidson: 

Yeah.

Laura Shin:

Did that go anywhere?

Warren Davidson: 

Thankfully, no. However, he continues to say that the only reason to own cryptocurrency is to launder money or evade taxes, and sometimes more pejorative things than that like fund terrorism. So, it’s safe to say that as long as he’s in that chairmanship it’s going to be a challenge to move legislation. Thankfully, Chairman…our ranking member, Patrick McHenry, is very pro-crypto, very pro the space. He hasn’t endorsed this particular bill, but I think, in general, as ranking member he tries to avoid those things, particularly things where there’s still a healthy debate on, and so it doesn’t tip his hand for lots of things. I think he might not supported it 100%. He’s got a few ideas, and so that’s why I say we gather the ideas that are coming in.

We might see it amended somewhat to get across the finish line and another thing. I was encouraged by Kelly Lafleur, in the Senate. I mean, she clearly understands the space, coming from her background, and in Wyoming, a state that’s really been phenomenal for crypto and tokenized assets, blockchain broadly, heavily due to Caitlin Long and a state legislature out there, but Cynthia Lummis is likely to be the next senator from Wyoming and she’s very strong on the issue as well, so hopefully, we’ll have knowledgeable allies in the Senate that will help us get momentum in a bicameral way and get this across the finish line, and the last I would say is just because Congressman Sherman is in a very influential position on this doesn’t mean that he will carry the day, so Maxine Waters and her staff have been attentive, they’ve listened. We’ve got a FinTech task force now and so Congressman Foster and Congressman Lynch have paid attention to it, and now Congressman Tom Emmer, as a Republican, is leading the Republican side and he clearly understands the space, and so I think there’s some opportunity for momentum, but yeah. 

I mean on virtually every issue, as you’ve alluded to, we’ve been disrupted by a health pandemic and now really a lot of attention to some civil unrest. I think, a lot of…I mean near-uniform concern over excessive force used against people broadly, and of course most recently George Floyd. 

Laura Shin:

Yeah. So, before we move on to those issues I do want to also mention that Congressman Patrick McHenry was on this show and he, at that time, talked about something new that he was proposing called the Financial Services Innovation Act, and it kind of would create something similar to a sandbox, which he was calling permanent beta testing, which was also an interesting idea. People can listen to that episode for more information on that, and also I did do an interview with Governor Mark Gordon of Wyoming, and certainly Wyoming is really out front and center, and I’ve also discussed Caitlin Long’s Avanti Bank, which is going to be launching, probably, sometime in the next year.

All right. So, in a moment we will discuss taxes and…well. Not taxes. Sorry. We covered taxes. China, Libra, additional dollar, COVID, and more, but first a quick word from the sponsors who make this show possible. 

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Laura Shin:

Back to my conversation with Congressman Warren Davidson. So, now let’s talk about the pandemic and also the record high unemployment, and all these protests, and of course, now we have this election coming up. So, given all those things how has that changed any of your strategy around trying to move some crypto-friendly regulation forward?

Warren Davidson: 

Well. As you saw in…well. Some of your listeners, or viewers now, may have noticed that there was a reference in one of the bills that had no momentum to central bank digital currency and research there, so in this space, obviously, some people view central bank digital currency as disruptive to private efforts and some people see it as an accelerant. Either way, China is moving forward aggressively with a central bank digital currency, and so we’re going to be following whatever happens in that space. There’s really not a lot of likelihood we’ll build enough momentum to be doing it concurrently, at least soon, so we’ll see how that plays out, but that was one of the references in the bill, and then, like I said earlier, a lot of the energy really has gone to trying to create economic stabilization as Congress recognized that you would have massive disruption to the economy, and the stabilization has gone pretty well in light of that.

I mean massive unemployment but directionally the funding from the Payroll Protection Plan, for example, which kept as many people as possible in their payroll, as that’s kicked in you’re starting to see people brought back to work and the unemployment number already trending down from the peak, and so you saw the fed step in with a lot of monetary policy, and that created a lot of attention because this isn’t money that the federal government’s really borrowing. We’re effectively printing it, altering the ledger so you say, and of course, that would be considered highly inappropriate in a tokenized asset, right. You’ve got the central bank editing the currency. We’re gonna dilute the value of your assets, and that’s exactly what’s happening to our US dollars, and so it highlights exactly why Satoshi Nakamoto drafted the white paper to explain Bitcoin.

Laura Shin:

It sounds like you’re not a fan of the way that this is being handled. Is it fair to say that you would trust a system more like Bitcoin that had kind of a programmed monetary policy?

Warren Davidson: 

Well. I think to say that I’m not supportive of it. Look, I voted for the Cares Act, which was 2.2 trillion dollars. I mean, you look at…the alternative was really you don’t think you should intervene in this, and so that highlights where some people in the space don’t support central bank. I think a central bank has a role, but I do think it’s cautionary. As people still say, oh, we should print another three trillion and another. The modern monetary theory people they believe if you have a central bank you can just keep printing. That’s not what history shows, and frankly, the logic of it is that you can just dilute the value of everyone’s money and there’s no consequence for it, and that’s completely irrational.

So, people in the crypto space, and obviously, Bitcoin fans will see the fallacious argument for what it is, but I think if you had Bitcoin as your national currency you would see the lack of flexibility that would provide for a central bank in a situation like this. I view Bitcoin, personally, kind of like digital gold versus a true currency. I think it’s a great store of value. I don’t own any personally. I think given the role and how vocal I’ve been as a legislator about the space that it would be inappropriate for me to do so, though not technically a violation of the rules, but I think that when you look at the challenge for it it’s highlighted…in the space one of the things that’s really important to me is central authority and the ability to do true permissionless transactions, so Bitcoin can do that, in theory, all the way, but in the US it’s heavily regulated by Bank Secrecy Act, any money laundering, know your customer provisions that require a lot of data collection about the on-ramps of how you come into owning the assets. 

Our country, constitutionally, is supposed to have privacy, not secrecy and that’s a tough Balance, and in our financial transactions in the US the Fourth Amendment’s been heavily eroded, so I think this space really, whether it’s…the form that it takes is incredibly important and that is really a lot of the tension between people that say, we want to…I mean, some of my colleagues literally want a back door so that they can see all the identity of everyone and even some want a node where they can approve or deny every transaction as the government, and essentially that’s playing out and that’s part of why Facebook was timely in their Libra discussion, is do you really want someone to filter your content in the same way, let’s say, Twitter is filtering content online right now, or do you want it to be truly permissionless like caches. I can take a 20-dollar bill and give it to somebody. I don’t need permission from anyone. We just need to agree I’m gonna give you 20 dollars in exchange for what you do, and there’s still consequences if you do that for things that are illegal but you don’t have to get permission from a central authority or a third party to be able to complete the transaction.

So, I think that’s the healthy tension that’s going to continue to exist in the space and it’s highlighted every day in our dialogue and some of that when you think about COVID-19, people really wanted to have all the identity of everything to reopen the economy. I mean, one of the proposals was…and so, I’ve been on the president’s task force for reopening the economy, and one of the proposals was that you would download a digital certificate to your phone every day and if you tested negative for COVID-19 then your certificate would be renewed for 24 hours, but effectively without that, the default condition is you’re in house arrest. That’s a fundamental change to American society. 

Permissionless systems are things that embrace America’s society and culture. I could see a system like that working in, say, China where the culture is different. In the United States, it’s a little ironic that we’ve been so slow to embrace things that other places, that don’t have our history of freedom and permissionless activity, embracing so I hope that we can kind of turn back and look at some of the core characteristics of cash, for example, and create that same filled with our payment systems.

Laura Shin:

Well. Gosh, there’s so many things in there but I think maybe the main thing I want to ask you is just, so do you feel that COVID now presents an opportunity for the government to take advantage of this technology in some useful way, or earlier when you mentioned how that digital dollar was put in that bill but it didn’t go anywhere, what were the arguments on either side and was you’re thinking that now was the time, maybe, to try to use this technology in the midst of this emergency because it is faster than traditional payment rails?

Warren Davidson: 

Well. I mean, I’ve been a fan of using the space since way before this so it just highlighted the gee, wouldn’t it be great if we could just move money this way, and as individuals get payments…I mean, the treasury was fairly efficient, in people that already had their accounts on file, moving the money directly into people’s accounts, but not everyone did, so they were so efficient that they sent cash to dead people, so hopefully, there would be some level of identity that let’s not do that, so there were some flaws. They tried to go very fast and they went fast but they found some errors, so I think a lot of the issues that would make that system function come together like identity, right, and the other piece that is very popular in this space is unbanked people. 

So, it’s hard for the treasury to move money to somebody who’s unbanked right now and a lot of the appeal of crypto is that your phone, or USB drive, some digital wallet, however, it functions on your hard drive, on your CPU, but a digital wallet could effectively be your bank if you’ve got a proper structure to it, so that could obviously be way faster.

Laura Shin:

Yeah, but are you going to try to use this opportunity provided by the pandemics to do anything, or do you feel it’s maybe just something we need to keep building and working on?

Warren Davidson: 

Yeah. I mean, Rahm Emanuel and others have made famous never let a crisis go to waste, and I’m kind of in the other theme in this sense, as someone noteworthy said, it’s always the right time to do the right thing, Martin Luther King, and I think that’s fitting on all sorts of fronts right now.

Laura Shin:

All right. Well. So, you did also mention China. That country has begun its pilot for the DCEP, which is its digital currency and payment system, and it’s also unveiled a very comprehensive blockchain initiative that really is almost as ambitious as the Belt and Road Initiative, and in your press release for the Token Taxonomy Act, you even referenced the fact that Xi Jinping has said that blockchain technology is 10 times more important than the Internet was. So, given the fact that they’re kind of already working on this and the US is still mired in dealing with the virus, and all this record unemployment and all these other things going on are you just concerned, in general, about the US’s ability to stay competitive when it comes to this technology?

Warren Davidson: 

Yeah. Absolutely. Look, the way China is trying to do this is different than a permissionless system, so my concern is that we not copy China’s system. I read an article during the pandemic that was concerning to me because they said on speech China got it right. We need the government to be the arbiter of truth, and…

Laura Shin:

Wait. Who said that?

Warren Davidson: 

It was an article in the Atlantic I wish I could attribute the professors that read it. 

Laura Shin:

Oh, I saw that one.  

Warren Davidson: 

And I’m like, no. I’m a no on that one, and it’s the same. We don’t want that to happen to our payment system either, but of course, China is implementing such a system, and as they’re going into large parts of the world, and heavily into Africa, ways to connect their structure to unbanked people it is a really big deal, and I think the other piece is when they can do that they truly do have a to the US dollar. 

So, the last time the planet had this much debt was after World War II and that led to the Bretton Woods Agreement that locked in the United States as the world’s reserve currency and post this pandemic, post this the world is going to have a massive amount of debt, and unlike World War II where we largely didn’t have debt…I mean we had a lot from World War II, a peak level for us, but compared to lots of the rest of the world our currency was viewed as the strongest and I’m not positive that’s the case, and when you look at whether it’s China, Russia, or even Christine Lagarde, at the European Central Bank, they’ve been longtime advocates of creating rival to the US dollar, whether it’s a different currency, a synthetic currency, basket of currencies approach, as Lagarde had proposed when she was at International Monetary Fund, so I really hope that we don’t move forward in a way that not only lacks what China and other parts of the world are doing but ultimately sees us undermine one of our core strengths, which is we are the world’s reserve currency.

It’s great for our economy, it’s great for our fiscal policy, our ability to get debt at affordable prices, and it’s actually very essential to our national security programs, so we don’t want to undermine that. We should be moving with FinTech instead of lagging, and unfortunately, we’re lagging.

Laura Shin:

Given that China’s forging ahead, the US appears to be dragging its feet when it comes to a central bank digital currency, would you say that Libra then, simply because Facebook is the only entity on earth that has a larger population than the population of China that, that is sort of going to be the counterweight to the dominance of DCEP?

Warren Davidson: 

I mean, it could be but fundamentally let’s look at Libra. I mean, it might get a lot of support from Europe. I don’t know if the intent was to replicate what Christine Lagarde had proposed when she was at the IMF, but the core premise of Libra is essentially a synthetic currency. It heavily represents…to me it looks shockingly similar to the proposal she had as a synthetic currency, so that would have a lot of appeal to a number of countries, and frankly to a lot of global corporations when you look at the foreign exchange market, Forex market, currency risk is one of the biggest hedges. It’s a huge market so synthetic has an appeal to a lot of folks.

Laura Shin:

Right, but I don’t know if you saw that they did change the plan recently to have different stablecoins. 

Warren Davidson: 

A series of stable coins in each place. Yeah, so I’m following that, and I think that’s a good way to accelerate what they’re trying to do. I don’t know that they’ve given up their end goal. They still want to keep their Libra association and do it, but they also said that if a country…if they go into a country they would set it up as a stable coin and if a country set up a central bank digital currency then they’re stable coin would go to the central bank digital currency. So, I think they’re trying to stay very compatible and build momentum behind their project and idea, and it certainly has the markets share, and the mind space, and already downloaded and installed on literally billions of devices, so it could really be a thing so we’ll see. 

Laura Shin:

Yeah, it’s interesting. The hostility we saw from lawmakers, in a way combined with their reluctance to maybe move forward on a US central bank digital currency, could actually accelerate Facebook’s dominance in this space and actually…well. One other question, do you feel like Facebook’s change in strategy has appeased those lawmakers who were hostile to Libra earlier?

Warren Davidson: 

Not entirely. I mean, it takes a little bit away by saying they’re their US product would be a stable coin, but when you look at the piece settling transactions, and things that aren’t US dollars for people like Brad Sherman, will inherently undermine the dollar, and I am a little concerned, again, because so much of the top-line attention goes to the currency issue and monetary policy concerns that while we’re dithering on this topic, and it’s incredibly important, we’re not providing any regulatory clarity for the nearly infinite number of potential use cases that don’t involve payment systems or currencies. They’re simply digital representations of goods, or services, or commodities, or it could be securities.

I mean, you could even do securities and shares more effectively, in lots of cases, with tokens. I mean, you could effectively have a bearer bonds represented in this space, so there is so much potential for this that I think the currency debate if we could even park that, we would do a lot of good for our economy and for innovation in the United States of America if we could provide that certainty for everything but currency and payment systems.

Laura Shin:

Also, to discuss the US digital dollar a little bit more, we have a former CFTC Chairman Chris Giancarlo who’s proposing one. He’s obviously a very credible person. Do you see the weight that he has influencing anything in improving or increasing the receptivity that various people in the government have to the idea of a digital dollar?

Warren Davidson: 

Yeah. I mean, I think he was a very credible person to lead this initiative and when the internet was forming in the ‘90s, building momentum in the ‘90s not really forming, the established media companies were very slow to recognize how disruptive this idea could be, so in a lot of ways when congress passed this light-touch regulatory clarity in the ‘90s there wasn’t a big lobbying effort to preserve the status quo, right, and so was seen as this blue ocean, blue sky, whichever holsters you want, total space that you’d be able to go into and innovate and create, and the…whether you’re talking central banks, or traditional banks, or payment processors, payment systems they all are very attuned to how disruptive this technology could be to their space, and so somebody that can truly speak that language and understand it, balance the relationships like he can, I think, was a very helpful thing but it’s still facing a very entrenched status quo that’s working hard to keep their current competitive advantage. 

Frankly, as we continue to delay in congress a lot of private sector companies, some of the biggest players in the space, are racking up patents to be able to lock out small early-stage innovators and trying to, essentially, dominate it once they do get 

Certainty, so that’s also unfortunate.

Laura Shin:

So, it sort of feels like if you just tie all these trends together it kind of paints a bleak picture, what we were discussing earlier about what China is doing what DCEP and how it’s using its leverage in Africa, also, to build, I guess, dependency on its currency there and if it is doing that in a way that’s reaching the unbanked, and also does it in a way with washing technology where this money…I think this version of money will simply be used more the way that…now with the internet, we message people on our iMessage’s, and our WhatsApp, and our Facebook Messenger, and Twitter and I just feel like once this technology really gets going there’s just going to be a lot more transactions, and if that’s happening on DCEP rails that just reduces the power of the US dollar. 

So, when you combine that with just simply the fact that the US dollar does obviously enjoy global reserve status at the moment, which kind of leads to a sense of complacency, do you feel that the US status, superpower I guess in a way, could be disrupted?

Warren Davidson: 

I mean, we’re going to stay a superpower. I mean, we’re…even if only the militarily. I mean, our economy is the largest in the world, or market’s the most functional in the world, our military’s the most powerful in the world, our intelligence and surveillance systems are unrivaled. So I mean, we will clearly be a superpower, and frankly, we should spend a little less energy worrying about being a superpower and more about doing the things that resulted in that, which was you know providing the world’s best market for goods, services, intellectual property, capital formation and when we do those things fundamentally the rest is going to take care of itself, and I don’t know. Maybe we can not squander resources in endless wars in more places, but that’s a separate topic. 

I think when you look at China, for example, the way they’ve begun to tie the pandemic piece back together, the way they’ve gone about their activities historically, and particularly in this pandemic, have really alienated a lot of countries, so they were they were literally leveraging their PPE, Personal Protective Equipment, stockpiles to say, well, we can get you some of these you know N95 masks and protective garments for hospitals and ICUs if you agree to use Huawei for your 5G implementation, right, and Western countries, in particular, are like you’ve got to be kidding me, to be polite about the reaction, right, and as people have seen how China wanted to leverage their power I think it’s caused a lot of people to check up, and let’s not forget that when China became part of the World Trade Organization they promised to become a market economy, and that was in the ‘90s, and so far zero countries recognize China as a market economy. Every country would recognize the things that China has done, with respect to intellectual property theft, with respect to blocking market access, or if you do get access you have to share the intellectual property and ownership of your company in exchange for that market, and then they don’t want to the same sort of reciprocal things.

I mean, in fact, to be listed on US exchanges Chinese companies don’t have the same audit standards, for example, so they’ve really been treated separately and I think, not just in the United States but around the world, people have kind of grown weary of that and now they’re much more cautious, so those activities could delay China’s ability to move forward on…whether its digital currency, or trade, or some of their other belt and road initiatives.

Laura Shin:

Interesting. I just wonder what leverage some of these other countries, though, have to not do business with China. I guess that’s where I was going with that questioning. I just worry that because of the power that they’ll build…well. And I can’t predict. I’m just surmising that that will give them…I mean, you already see it with how they are influencing huge actors from the NBA, to the WHO, to basically get those organizations to censor themselves based on what China’s priorities are, and what they’re using is their financial power, so I that’s…I just worry about them building even more financial power. 

Warren Davidson: 

Right,  and you look at American companies who would never accept that from the American government but in exchange for market access in China they’ve…I mean, you had Google employees threaten to quit or quit if Google cooperated with the Department of Defense, yet Google, in exchange for market access in China, has done all sorts of things, right, so \ it is an interesting paradox, but I think because of that you’ll see supply chains shift. Not just American supply chains but a lot of supply chains will be disrupted in China has built this power because, A, they committed to be a market economy and they provided a great place to innovate, they have a huge potential market, but they’ve really made it so that a lot of other countries can’t really get that without undermining their own futures, and so that’s kind of a separate topic, in the sense of how China’s done it but it may delay…it may give us a little bit of time, on the currency side, for the US to kind of get our own house in order, but again, my fear is that we get so bogged down with the currency aspects that we don’t really provide the certainty for the thousands, tens of thousands, massive number of use cases that don’t involve currency.

Laura Shin:

And what do you say to those who are nervous that moving to digital currencies could hurt the US government’s ability to influence foreign actors, in terms of imposing sanctions, etcetera?

Warren Davidson: 

Well. I think if you’re concerned about that, and it’s odd that you would want to stay passive and watch other countries, like China, become the default system, right, or 

other domiciles like Switzerland become the regulatory entity, or Nexus, right. London also working very hard to be a financial capital, and I think very smartly offering asylum to all the people from Hong Kong that want to move to London, and so I think London is 

working to really…they’ve always been a large financial market, and a rival to New York, and in this digital space they’re clearly outpacing the United States. I mean, the Bank of England has acted to provide, essentially, two financial FinTech companies, the same sorts of things that they’re doing for big banks, in terms of overnight clearing and funds, so you could, in theory, access the Repurchase Agreement Market as a FinTech company in a way that you can’t do with the Federal Reserve, so we’re a long ways out from that kind of thing happen in the United States.

So, if you’re really concerned about the United States’ ability to preserve the kind of system that we’ve used for sanctions in tracking you know illicit finance it seems like you would want to be more innovative instead of more stagnant. We’re essentially trying the Sears Roebuck approach to retail and I don’t think that’s really smart. I hope it doesn’t turn out as badly for us as it did for Sears.

Laura Shin:

I would agree with that. So, let’s also now just turn to this upcoming election, which obviously is going to be one that many feel passionate about on both sides and it seemed since you had both Republicans and a Democrat sponsor, the Token Taxonomy Act, that that had bipartisan support. Do you feel that any of this stuff going on with the pandemic, or the record unemployment at any of This, or the social unrest, that that has, in any way, affected the bipartisan nature of this legislation? In general, how do you feel the outcome of the election could affect crypto-friendly regulation being adopted in the US?

Warren Davidson: 

Yeah, so with respect to this legislation my hope, and for a lot of things, even the news cycle…if you watch the news you’ll see polar opposite versions of the same event depending on which channel you flip to, and I keep hoping what will be popular is a just the facts approach, like since you couldn’t be here, here’s what happened, and bipartisanship, on some of these kinds of things, will become trendy again versus partisan messaging bills. I think the country, in a lot of ways, is hungry for that and so my hope is, going into the election cycle, that a bill like this, which is not partisan, could get some momentum to show that hey there really is a way for us to work together on some issues, and frankly a lot of issues like that in the financial services space aren’t partisan it just doesn’t get much press, right, so I hope that we can find a way to work together to get this and a lot of other things done, and maybe even get some news for the fact that we do get along and work together on a lot of things, but yeah.

Laura Shin:

I’ll give you that news. I’ll cover it. 

Warren Davidson: 

Yeah, it’ll be great, I hope, and eventually, I’m sure we’ll get there but maybe not before November, but going into November one of the biggest things for the House of Representatives, every member of the House is up every two years so we’re all up for re-election, and the house is a completely majoritarian body so if you have control your party becomes Speaker, then you are the leaders of all the committees, and so the leadership really would matter in the sense that if the Republicans flip the house then, of course, Brad Sherman wouldn’t be the leader of the Capital Markets Subcommittee, and in theory, Patrick McHenry would be, if he stayed in his current role, the likely Chairman of Financial Services and so he would be more likely to be pro this legislation. Then Maxine Waters has shown herself to be, so far, but it’s not clear, A, that that will be the outcome, and B, that we would still get momentum on it because you’ll see it, but it seems more likely in the house that that would be the case, and then we’ll see with the Senate, will see what the presidency.

It’s not a partisan bill so I don’t know if Joe Biden or Donald Trump are more or less likely, or a player to be named later, right, so there’s a lot of speculation about where the election cycle is going at this point.

Laura Shin:

Right. Well, that aside, what help do you wish you had from the industry to help get any kind of crypto-friendly regulation push forward, whether it’s the Token Taxonomy Act or something else?

Warren Davidson: 

You know, I think the biggest thing that I would love to have would be a consensus that we should have a real hearing focused on this space, and even if we have to set aside all the payment systems and currency issues for the focus of the hearing, that we had a hearing about it where the Token taxonomy Act was a bill that’s noticed for the hearing so we could have one or two hearings that cover this in depth and then we could go into a markup, and that’s the path that most legislation follows, that you have a committee hearing, you go to a markup where it’s an internal meeting, no outsiders, but Republicans, and Democrats, and others in the committee, with a chance to amend and then you vote on the bill as amended, and again, I think we have broad bipartisan support for this legislation that would only be made more broad and more bipartisan by going through that markup piece where people could offer their amendments, and hopefully that would result in a product that’s functional.

That’s also how some legislation passes, but the industry goes, what happened here. We thought we had something. Hopefully, it comes out in a usable form, but I’d love to see that happen and I can’t see a downside to doing a real hearing about it, personally. 

Laura Shin:

Right. Hopefully, it wouldn’t end up being like the New York BitLicense, which obviously was something that the industry really felt had been imposed from above and did not take into account their wishes. So, before we close up I had a fun question for you, which is I wanted to address that moment in the congressional hearing on Libra when you asked Meltem Demirors, of CoinShares, to explain the difference between Shitcoin and Bitcoin, and it appeared that maybe ever-so-slightly there was a little smile on your face. Did you plan to use that word Shitcoin and did you do it for the kicks of having it in the Congressional Record?

Warren Davidson: 

Well. I didn’t go into the hearing planning to do it and I had not spoken to Meltem before. I never actually personally met her before that hearing, and so I was listening to her debate and I thought I might be able to broach this topic, but I hadn’t thought whether I would actually use the phrase Shitcoin, and I thought, this is the most effective way to illustrate it and I think she’s going to be able to go there.

Laura Shin:

Well. So, it’s funny that you sort of clued in on that without having known her because when she came on my show there was just more profanity in that show than in any other show and she used that phrase. Specifically, she actually talked about what she called the Shitcoin Waterfall, and that had to do with ICOs, and if I remember correctly I think we even named the episode…we had a Shitcoin Waterfall in the title, so she’s very well known for using that word so it’s kind of amazing that you didn’t know that and you didn’t plan it. 

Warren Davidson: 

I didn’t even know that she had used a toilet as a prop at another time, but I could definitely sense that she clearly was in the Bitcoin camp, and yes, many of these other things are in fact colloquially known as Shitcoins.

Laura Shin:

Right. Well, that was just such an iconic moment. It will go down in the history books. Okay. Great. Well, where can people learn more about you, your work in the house, and the Token Taxonomy Act?

Warren Davidson: 

Yeah, so our official website is Davidson.house.gov. People can go there and see bills that we’ve sponsored, co-sponsored, press releases, sign up for our newsletter, and all of our social media accounts.

Laura Shin:

Perfect. Well. Thanks, so much, for coming on Unchained. 

Warren Davidson: 

Thanks, very much. I really appreciate what you do.

Laura Shin:

Thanks, so much, for joining us today. To learn more about Congressman Davidson check out the show notes inside your podcast player. Don’t forget you can now watch video recordings of the podcasts on the Unchained YouTube channel, go to youtube.com/c/Unchainedpodcast and subscribe today. Unchained is produced by me, Laura Shin, with help from Fractal Recording, Anthony Yoon, Daniel Nuss, Josh Durham, and the team at CLK Transcription. Thanks for listening.