Okay, thank you to Anatol and Amelia for coming out. I'm happy to introduce our next two guests. He is an expert in all things regulation in crypto, holding his JD from the University of Chicago Law School. He is a partner at O'Melveny & Myers. Previously, he has been the Controller of the Currency and therefore provides extensive insight into how the federal government operates and thinks about crypto. Please join me in welcoming Brian Brooks.
The head of digital assets research at VanEck will also be joining us today. VanEck has played a pivotal role in the institutional acceptance of Bitcoin and cryptocurrency at large. One example of this is in the recent spot Bitcoin ETF applications and approvals, of which VanEck was a part. There's no indication that VanEck will be stopping there, and they will play a massive role in pushing blockchain and cryptocurrency from the fringe to the mainstream. We can't wait to hear about how they're thinking and what they're looking at next. Please welcome Matthew Sigel.
Thank you everyone for joining us through the continuation of today's content. Matthew Sigel with VanEck. I'm so thrilled to have the opportunity to talk with Brian Brooks today. He's one of the most wide-ranging thinkers in the space. He's been an operator, an investor, litigator, policy maker. So I hope you'll indulge us in a wide-ranging conversation with three principal elements: one kind of education, the second about policy, and the third about investing and entrepreneurship.
Just to start on the introduction, and given that we're in a room full of students and the VanEck digital assets curriculum blends the vocation of business school with engineering, I found that most people who get into crypto do it either from the ideological hard money aspect or from the engineering point of view. For me, it was definitely the former. And I have to imagine that you, as a former Fannie Mae executive, perhaps got disillusioned with the way that certain institutions were run in the wake of the financial crisis and found Bitcoin through that lens. Is that accurate? Maybe you can elaborate.
Well, it's a funny story, Matthew. You're right, Fannie Mae had something to do with it. So for those of you who don't know my background, I sort of grew up in big, broken banking institutions, and one of them was Fannie Mae, which was the biggest institution that actually brought you the financial crisis. It was the failure of that company that really did create the financial crisis. But before Fannie Mae, this is a great story that many people don't know. Before Fannie Mae, I lived here in Los Angeles, and I was one of a group of five people who had bought a failed bank called IndyMac. Now, I don't know how many people here are from the LA area. Does anybody remember IndyMac? Nobody's old enough to remember IndyMac. I see a few people who remember. So IndyMac failed. There were a group of us who bought that bank, and there were two of us who worked there, okay, that became big crypto people. One of them was my friend Alicia, who was the CFO of our little bank in Pasadena, California, and the other was me. We sold that bank and we went off to do various other things. And then one day, years after that, she calls me up and she says, 'Hey Brian, I've got this offer to be CFO of a startup you've never heard of called Coinbase, and we need somebody to come and run the legal and policy and risk stuff. You want to get the band back together?' And so Alicia and I went together to go build Coinbase, you know, with Brian and Emily into what it turned into. But the reason that matters is, you know, IndyMac was another one of those companies that brought you the financial crisis. And why? Because in those days you could manipulate your loan application, and you were very susceptible to Federal Reserve rate changes, which caused incredible volatility in traditional assets. And so, I, you know, others in this room may agree or disagree, but if there's one thing I figured out is like when people tell me how volatile Bitcoin is, it's like, you don't remember subprime mortgages. Let me tell you what's volatile. Okay, so my theory was there's got to be a better way, and that's kind of what led me to this.
As you think about the types of curriculum that maybe if you were designing for these students, what element of blockchain tech or business do you think is overlooked or should be at the base of that foundation for things?
Yeah, so you know, I think what many people don't understand, including many people who have been working in this field for years, is the question that every entrepreneur should ask himself on day one, and that is: what problem are you trying to solve? So you mentioned two, but I'm going to give you another one. So one thing you mentioned was engineering. You know, cryptography is a really interesting problem, particularly in live computing environments where value is being exchanged in real time. That's a fun engineering problem to work on. The other is the ideology of hard money, which is I think we've all just lived through three years of inflation that has ranged between two and four times what the inflation rate should be. Right now it's doubled what it should be, and it was four times what it should be. There's another reason, which is really what motivates me, and I think curricula don't focus on this enough, and that is the superiority of decentralized systems to centralized systems in almost any decision-making framework. Okay, so if you spend enough time looking at it, it doesn't just have to be financial services, but let's take that as a base case for crypto. If you look at the things that cause financial crises, they're almost always some kind of failure of a central decision-making authority. So an example I give often is, you know, one day, and again I realize some people are too young to remember this, but like 10 years ago there was a disaster at JP Morgan one day where a trader placed a trade, went out to lunch, and when he came back from lunch he had lost $6 billion on that trade. And that happened for two reasons. I mean, one was arguably the guy was out to lunch even before he went out to lunch, but the other one was their Chief Risk Officer position was vacant and nobody was checking the checkers. Right? So this one guy made a mistake and in the space of a couple of hours he lost $6 billion. That's a failure of centralized decision-making. Or another example would be think about the subprime mortgage crisis where you have a bunch of guys on a credit committee and various different lenders and they're deciding it would be a great idea, we should totally make this loan to the school teacher because she says her salary is $600,000 a year. Now normally you'd be able to verify that, but in those days some central decision maker said it's totally reasonable that a school teacher makes $600,000 a year, so we make her this large loan with no other documentation. When you see the failure of centralization, the point of a lot of what crypto is is to create incentives for collective, decentralized decision-making that don't rely on any one person. So there's a ledger that is maintained through a consensus mechanism, no one person can forge that ledger the way that they could in a... it's those kinds of things. And so I think looking at decision science and thinking about resiliency of networks versus the resiliency of siloed systems, that's a set of things where business schools do teach that, but they don't necessarily teach it in the context of technology. And I think, Matthew, that's the thing we can bring together here.
Sure. So if I were to play devil's advocate to that view that decentralized systems are more resilient to single points of failure, it would be that in our current financial system and our centralized administration has made it clear that when a decentralized system breaks, there's no one to pick up the phone to call, and we don't necessarily know who the beneficial owner is of whatever assets they may have corrupted. And there is at the core kind of a kryptonite element to crypto when it comes to our financial system. So that's as a way of asking you, as the former acting head of the OCC, which in the waning days of the Bush Administration famously pushed through a couple of things that were probably incrementally positive to the industry, and now we've had these three intervening years of the reverse. So if we do have a new administration next year, maybe you can frame for us what the OCC does very briefly and what it might do in the future to change the trajectory.
100%. So first of all, I'm going to correct two things you said, okay? Which are important. I mean, one's important. The one that's not important is it was the Trump Administration, not the Bush Administration. Excuse me. Okay, Trump. Trump's name can't even be said, I get it. But what you said that's not quite accurate, I want to frame this because this is actually, if you remember nothing else I said, this is really important. The things we did on crypto weren't incremental, they were actually game-changing. And you can measure how game-changing they were. So if you look at what we did around crypto during my year in office, we did four things. Okay, and every day we did this, you can look back at what happened to Bitcoin price and market cap of the overall crypto market that hour, and you can see what happened. So if you look at the first thing we did, this was in roughly July of 2021. Okay, in July of 2021 my agency put out guidance that authorized national banks to custody crypto assets. That doesn't seem like that big a deal, right? We didn't say that they can hold Bitcoin on balance sheet, we didn't say that they can speculate or trade or whatever. We just said, look, you know, the national banking system is custodian of every other asset: stock certificates, fine wine, art, you know, you name it. The national banking system is the custodian of choice for every asset. Why shouldn't it be for Bitcoin? In the 60 minutes after we released that, the price of Bitcoin went up 8%, or roughly $90 billion. That's not incremental. Same thing when we issued our second piece of guidance wherein we said that banks have the authority to hold the reserve accounts that back stablecoin projects. Again, the overall crypto economy went up like high single-digit percent. Fast forward, so I'm not going to claim credit for all of this, fast forward to what happened in January of this year when your Bitcoin ETF got approved. I don't know how many people looked at this, but between, so if you want to know how valuable regulatory clarity is, and I'm just trying to show you it's not incremental, okay? It is not incremental. Between the day that the Bitcoin ETF launched, so final approval was granted, and about a week, which is the last time I looked at this number, the market cap of Bitcoin increased 550% for a total of an increase of about $450 billion. The market value of regulatory clarity was $450 billion. So my main point here is it isn't incremental, it's actually vast, because what happened is suddenly we were able to allow the market to serve the true demand for Bitcoin, whereas before that we had artificially constrained demand by prohibiting institutions, retirement savers, everybody else. So this is a big effing deal, okay? Now your question was what the heck is this little thing called the OCC, other than something that juices the price of Bitcoin, well, and what can it do in the next administration, might. So I'll just give you a very quick sort of thumbnail, we can decide where you want to take this. But so the agency that I ran, which is called the Office of the Comptroller of the Currency, it's the oldest federal agency, it was founded in the Lincoln Administration, and it was the agency that is responsible for both creating and supervising the national banking system. So all of the largest banks in the United States are national banks rather than state banks. So Wells Fargo, Citigroup, Bank of America, you know, all of the largest banks by assets, roughly 70% of the total assets in the financial system are regulated by the OCC. It's the most important agency you've never heard of. And one of the interesting things about it, I will just say, and this is why a new administration can make so much headway if it chooses to, is that almost every agency in the federal government, all the New Deal era agencies, they were all created as basically five-member boards or commissions. So you think of the FDIC, the SEC, the CFTC, the Federal Reserve, all of those things, they all have a head, but the head can't do anything alone. The head has to get a majority of his board, you know, to vote with him to get anything done. What's different about the OCC is there is a single person called the Comptroller, that's what I was, and that person can enact change by himself. So it has the ability to move faster and more nimbly than any other agency. And what I would say you ought to be looking for in the next administration, you know, depending on who wins, I mean, in a second Biden term, unconstrained by the need to run for re-election, we could speculate about what that means for crypto, but we already see where the breadcrumbs are leading. In a second Republican administration, the kinds of things I would expect you would see would be, first of all, a very, very different approach to bank policy. So those of you who work in crypto know it's very difficult for a crypto firm to get a bank account, not just for fiat rails and on and off ramps in and out of Bitcoin, but I mean to get a payroll account, you know, to get a loan on your building. I mean, it's very hard for anybody who derives their money from crypto to access the banking system, and I would expect that to change significantly. So you'd see a change in bank policy. You would certainly see multiple layers of change in securities policy. So, you know, you people who follow this will know the SEC enforces against virtually everything in the crypto space, and sometimes it wins, but much more often it loses. I mean, just a few days ago, Matthew, you remember that case involving what were they called again? The SEC got sanctioned. Yeah, exactly, Debt Box. And so the federal court in Debt Box said that the SEC had engaged in a gross abuse of power so bad that it had to be sanctioned. I mean, it's almost unheard of for a... but that's how aggressive the SEC is in shutting out any kind of crypto project, whether meritorious or not. So there's a significant set of changes coming out the securities side that we've talked about. And then the last thing I would say, which doesn't get nearly enough attention but I think is really critical, so I'll call it out here, is what I think of as FinCEN policy. It's neither bank nor security specific, but FinCEN is an enforcement agency inside the Treasury Department. It stands for the Financial Crimes Enforcement Network. It's responsible for enforcing the anti-money laundering laws and sort of the terrorism financing laws. Historically, FinCEN in the world of crypto is focused on trading platforms, people who are actually remitting money from one person to another, which makes sense. They're worried that somebody might be making donations to Osama bin Laden or, you know, whatever. And so it makes sense to look at that. But there's talk in Washington that in this administration, FinCEN is looking at significantly broadening that to say not only are people who control money, you know, including cryptocurrencies, not only are those people covered by these laws, but people who control protocols might be in charge of these laws. So, you know, imagine if Anatoli, who you just heard from, suddenly was a money transmitter just because he's the guy who built the Solana blockchain. Like, we don't think of technology, you don't think of Apple even though you have a banking app on your iPhone, you don't think Apple is responsible for terrorism finance. But there are proposals inside of FinCEN to change all of that. And so what I would say is you're going to see a significant scene change depending on who wins the election on our approach to pure decentralized technologies, forget about money transmission, and there's a lot of things to worry about there.
Let's drill in on the second part, the securities regulation. There are media reports today that the SEC has subpoenaed documents from the Ethereum Foundation and may be looking to reconsider its prior view that Ethereum is a commodity, which was implied in its approval of the Ethereum futures ETFs. Do you think that's a concern, first of all? And second of all, how might SEC policy functionally change if we have a new president? Is it the president just saying, hey, let's ease up on enforcement? Because in the absence of legislation, one might argue there's little a president could do.
Yeah, well, so first of all, there's a lot that any president can do, and you're seeing that now. So you would see that certainly as much in a different administration. So I think, Matthew, the first thing that the audience needs to understand is, and I'm not saying this because I'm some partisan hack, I mean, the other side would tell you this, there's a whole-of-government opposition to crypto today, and it's not an accident, and it's not based on the nuance of securities law. It's a policy judgment that was made at the time of the election. And what I mean by that is that a thing that happened in the 2020 election that's not as widely known as it should be is when then-candidate Biden was running for office, and if you remember, he lost the first two primaries, so he was not looking like a likely winner, and he went into the South Carolina primary, which was the best chance he had of locking up delegates going into the next Super Tuesday campaign. Elizabeth Warren at the time was a strong candidate. She was seen as a very viable opposition candidate. There was basically Biden, Sanders, and Warren. Warren struck a deal with the Biden campaign during the South Carolina primary, it's a true story, which basically said, listen, in exchange, because this was her talking, you know, I don't see a path to raising enough money to get through Super Tuesday even if I might come in second here, blah, blah, blah. So I tell you what, I will drop out and I will endorse you if you will agree that I get decision-making authority over the financial agencies. So I get to pick the heads of those agencies, and those agencies are going to agree to implement an agenda that I have. And this makes sense, right? Because her whole career was about consumer finance and consumer bankruptcies. I mean, she cares more about these issues than any other single person. And that deal was struck. So she endorsed Biden, Biden became the nominee, and won the election. What you see today, therefore, it's not Gary Gensler reading the securities laws and saying, oh, you know, regrettably Ethereum might meet the standards to be a security. He was put there to fight crypto. Right? Remember, Elizabeth Warren has a campaign apparatus called the anti-crypto army. That's her name, not mine. So too with the acting Comptroller of the Currency, another person who was picked from the Warren world to come and enact that policy at the OCC. So too, you know, a number of other key people, specifically including the head of the SEC, Gary Gensler. What you would see in a Trump administration is something that would be very, very different. So first of all, and I take a little bit of personal credit for this, it's not all me, but I think I was the first person to start this conversation. I spent a lot of time with the Senate Banking Committee Republicans and the House Financial Services Republicans talking to them about the fact that banks in particular were working hard not just to starve crypto companies of finance, but lots of other unpopular industries too. And I made them understand that on one political side of the aisle, crypto is seen as the same as gun manufacturing, the same as oil drilling, you know, the same as coal mining, the same as private prisons. These are all big industries in the United States, right? And all of those industries are thought by a certain group of leaders as unworthy of access to the banking system. When the Republican leadership started digging into that, they realized that there's a bigger problem, and crypto is a species of this issue, which is that certain industries and people no longer really have fair access to the banking system. And because of that, you've started to see people like Patrick McHenry, the chair of the House Financial Services Committee, you know, multiple people on the Republican side on the Senate Banking Committee, not so much Tim Scott, the ranking member, but a lot of others, they're making a whole career out of giving pro-Bitcoin speeches. And, you know, behind the scenes, I mean, I talk to a lot of Trump transition people all about who are the people who are going to be influential on crypto policy. So I think it's not that you're going to get a bunch of super Bitcoin maximalists coming into office, but what you will get is a bunch of people who are very suspicious that the banking system is trying to crowd out innovation because they want to be able to decide who's in and who's out. And the core thing about crypto is because it's decentralized, it is therefore unbiased, and, you know, you can't take my Bitcoin and you can't keep me out of this blockchain environment. That's why that party likes it. So you'll see a philosophy change.
At the risk of putting you on the spot too much, what if you had to place odds on an Ethereum ETF approval, considering this little wrinkle today about the news of the subpoena, what would your odds be? And is it meaningful?
I mean, look, if an Ethereum ETF gets approved before the election in November, I'll eat my hat. I'll not only eat my hat, I'll eat your hat.
Another policy challenge is one of governance, I think, for many crypto projects. If we look at the reasons why SBF is in jail, why CZ will spend time in jail as well, and a common thread, especially in non-American crypto projects and exchanges, is that there's a single person who controls multiple entities, and the entities have related party transactions between each other which are not disclosed, neither to retail nor in some cases to institutional. And that type of governance is not accepted anymore in America, at least not for financial institutions.
What do you mean anymore? Like, not since the '30s. And if Elizabeth Warren had her way, it might apply to all private companies, right? Oversight of governance structure of private companies.
