What to watch from Senate Banking today as crypto reels

From: POLITICO's Morning Money - Tuesday Feb 14,2023 01:01 pm

Feb 14, 2023

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Breaking — President Biden plans to name Federal Reserve Vice Chair Lael Brainard to lead the National Economic Council, filling a gap left by longtime economic advisor Brian Deese, Victoria Guida and Ben White reported late Tuesday night.

With inflation still raging, Brainard’s departure leaves a huge hole at the Fed on payments, central bank digital currency and the Community Reinvestment Act. Brainard was also a potential leader for a softer approach to the labor market as the Fed deliberates on when and how to stop its rate hike campaign. All Fed-watching eyes will turn now to her replacement.

Gossip focuses on San Francisco Fed President Mary Daly, New York Fed President John Williams, former Obama adviser Betsey Stevenson and Morgan Stanley global chief economist Seth Carpenter, among others, according to people connected to the Fed and the White House. This parlor game is only just getting started. — Victoria Guida

The Senate Banking Committee certainly has a knack for timing.

The powerful committee will hear testimony at 10:30 a.m. Tuesday on how Congress should set rules for crypto markets, which lost roughly half their value over the last year. Following FTX’s collapse, stalwarts like Gemini, Genesis, Kraken and now Paxos — the company behind the global exchange Binance’s dollar-pegged stablecoin — face an onslaught of legal challenges that threaten their businesses.

The regulatory offensive, led by SEC Chair Gary Gensler, has already created an existential crisis for the industry.

So what should you keep an eye on during the hearing? Tim Scott and stablecoin policy.

Scott, the committee’s new ranking member, has mostly avoided crypto policy scrums until recently. The South Carolina Republican earlier this month said he’d like to develop “a bipartisan regulatory framework" for crypto. A Senate Banking Republican aide on Monday told MM that Scott’s opening statement and questions will likely focus on promoting innovation and protecting consumers.

The latter, in particular, could provide some indication on where Scott might find common ground with Committee Chair Sherrod Brown (D-Ohio), an industry skeptic who last year requested Treasury Secretary Janet Yellen assist in identifying policy gaps to address the risks posed to consumers, investors and the financial system.

Senate Banking’s former top Republican, retired Sen. Pat Toomey of Pennsylvania, was a key crypto industry ally who frequently blasted regulators and Congress for failing to tailor rules to accommodate startups. Your MM hosts will be watching closely to see if Scott — who’s believed to be preparing a presidential bid – strikes a more neutral tone on digital asset policy than his predecessor.

Stablecoins — One area where we’ve seen bipartisan cooperation on crypto policy — albeit in the House — is around stablecoins, dollar-pegged digital tokens used to buy and sell cryptocurrencies.

Yellen and federal regulators have warned for more than a year that the businesses behind stablecoins could become a risk to the financial system if they remain unregulated. Those warnings are going to be top of mind for lawmakers after New York Department of Financial Services Superintendent Adrienne Harris on Monday ordered Paxos to stop issuing Binance USD stablecoins. The company also faces a potential SEC enforcement action alleging that BUSD is an unregistered security. (Paxos “categorically disagrees” with that claim and is “prepared to vigorously litigate if necessary,” according to a statement).

Two of the committee's witnesses — Duke Law School Professor Lee Reiners and Linda Jeng, a former Fed official and Georgetown law adjunct who leads global policy at the Crypto Council For Innovation — have submitted written testimony that dive into some of the thornier aspects of stablecoin regulation.

With House lawmakers plugging away on their own stablecoin bill, Tuesday’s hearing will offer an opportunity for Senate lawmakers to weigh in.

IT’S TUESDAY — Send your thoughts and news tips to Sam at ssutton@politico.com and Zach Warmbrodt at zwarmbrodt@politico.com. You can also find us on Twitter @samjsutton and @zachary

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Driving the Day

All eyes are on the Labor Department’s consumer price index release at 8:30 a.m. this morning. The median forecast for annual headline inflation is around 6.2 percent and for core to come in at 5.4 percent, which would signal a further slowing of inflation. Stocks climbed on Monday in anticipation of the data.

Beyond that … Yellen is speaking at the National Association of Counties legislative conference at 9:45 a.m. followed by President Joe Biden at 11 a.m. … World Bank President David Malpass will participate in a panel on global trade at 10:30 a.m.

CRYPTO UNITES WARREN, BANKS — Our Zachary Warmbrodt: “Sen. Elizabeth Warren is branding herself as the scourge of crypto. And she's not doing it alone … Her budding partnership with GOP lawmakers reflects broader forces that are poised to unite progressives and conservatives, watchdog groups and bankers, who share common cause in wanting to derail the unfettered growth of crypto.”

CHINA — Our Gavin Bade: “The uproar over a suspected Chinese spy balloon — and three other unidentified flying objects — has brought an abrupt halt to Beijing’s nascent Washington charm offensive, emboldening Biden administration officials and lawmakers looking to crack down on Beijing’s economy.”

— The WSJ’s Jason Douglas and Stella Yifan Xie: “The world is counting on an economic bounceback from China to power global growth and help keep recession at bay. Don’t bank on it.”

— Bloomberg’s Bill Allison: “Republican politicians are stoking outrage and raising cash over the alleged Chinese spy balloon that crossed the US before it was shot down.”

Talking Points

Coinbase CEO Brian Armstrong was left with some free time in Dirksen Senate Building Monday after a meeting on the Hill fell through at the last minute. (Looking at you, Super Bowl hangovers!)

Armstrong, who made headlines last week for decrying a potential ban on the income-generating practice known as staking, is one of the SEC’s most vocal critics. He and his team, including Coinbase Chief Policy Officer Faryar Shirzad, are making their D.C. rounds in the first half of this week as Congress continues to map a path forward on cryptocurrency legislation.

The agenda: “What we're here to do is to see if we can get regulatory clarity in the U.S. and sensible crypto regulation passed,” Armstrong told our Eleanor Mueller. “My hope was that in the wake of FTX, that we'd see some urgency because we need consumer protection, obviously. So we want to bring this industry into the regulatory theater and get even more clarity that bills here in the United States [are going to pass] — because otherwise this stuff is going to go offshore.”

Cautiously optimistic?: “I've been coming to D.C. maybe twice a year for the last six years,” Armstrong said. “I'm hoping this is the year where you finally get some traction."

Markets

CHILD LABOR LAWS — WaPo’s Jacob Bogage: “As local economies grapple with a tightening labor market, some state legislatures are looking to relax child labor protections to help employers meet hiring needs.”

WEAKNESS — Reuters’s Caroline Valetkevitch: “U.S. companies' earnings woes are likely to extend beyond the weak fourth quarter, as a booming labor market weighing on margins looks set to hurt results in the first half of this year.”

A BRIGHT SPOT FOR TECH — NYT’s Steve Lohr: “The economic outlook is uncertain. Contingency plans are in place. Some initiatives are being trimmed back or slowed down. But business investment in technology remains remarkably resilient, and that trend appears likely to continue in 2023."

OIL FALLS — Bloomberg’s Jake Lloyd-Smith: “Oil fell on a US plan to sell more crude from its reserves, offsetting a lift from Russian output cuts and rising Chinese demand.”

Regulatory Corner

Bank capital rebuttal — Better Markets President and CEO Dennis Kelleher responded to Monday’s MM lead item about big banks trying to head off capital increases.

He pointed to Better Markets’ recent report that makes the case that higher capital requirements would protect the economy. He rejected the claim that “nothing really suggests” higher capital requirements are needed.

“This is especially important now as the number, size, complexity and risk of too-big-to-fail banks continues to increase significantly,” he told MM. “Fortunately, the Fed well understands this and that the best way to prevent bank failure, contagion, crash and taxpayer bailouts is to ensure they have the quantity, quality and ready availability of capital to absorb their own losses, which should be no less than 20 percent.” — Zachary Warmbrodt

Fly Around

Japan’s economy returned to growth in the three months through December, but with the momentum still weak the central bank’s new governor will face challenges in steering monetary policy through uncertain terrain. — Bloomberg’s Erica Yokoyama

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