Crypto in Congress: Rep. Warren Davidson

The Token Taxonomy Act, the importance of financial privacy, and Bitcoin's role in the digital dollar debate.

Hello!

The second episode of HODLpac’s interview series with members of, and candidates for, the United States Congress is available now.

This week, Rep. Warren Davidson talks about his role in elevating crypto-related public policy issues in DC, the lessons the digital dollar can learn from Bitcoin to avoid being a “shitcoin,” and the importance of financial privacy.

You can also listen to it on Spotify or SoundCloud or read the transcript below.

Enjoy! And be sure to visit www.hodlpac.org to learn more about how to get involved with HODLpac - a community-governed political action committee dedicating to supporting champions of crypto-friendly policy in the United States Congress.

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HODLpac:

Hello and welcome to the second episode of HODLpac’s interview series with members of and candidates for the United States Congress. 

HODLpac is a community governed political action committee with the mission of supporting candidates whose policies would promote the development of cryptocurrencies and the decentralized economy in the United States. Much like the cryptonetworks we want to see thrive, HODLpac relies on the participation of the community. Those who donate, decide which politicians we support. 

If you’d like to learn more and get involved, feel free to visit us at www.hodlpac.org. 

I am your host Tyler Whirty. 

Our guest today is Representative Warren Davidson of Ohio’s 8th district. Representative Davidson sits on the House Financial Services Committee and is an active champion for pro-crypto policies in Washington. He is the sponsor of many relevant bills related to crypto, including the Token Taxonomy Act, the Virtual Currency Consumer Protection Act, and the US Virtual Currency Market and Regulatory Competitiveness Act. He is also a member of the new Fintech Task Force.

However, perhaps the thing the congressman is most famous for in the crypto community is his introduction of the word “shitcoin” to the Congressional record.

Representative Davidson, welcome to the show!  

Rep. Davidson:

Nice to join you. Thanks for meeting with me today.

HODLpac:

Absolutely, thanks again for coming on. You’ve been on a few different Bitcoin and crypto-related podcasts, where you’ve gone into great detail on your views on the subject, including: Noded with Pierre Rochard and Michael Goldstein, Pomp’s podcast, and Laura Shin’s Unchained podcast. Eventually we’ll have links to those conversations up on your HODLscore page on our website but for now we’ll link to them in the transcript. I definitely encourage anyone listening or reading along to go check those out because those people are all much better interviewers than I am.

But nonetheless, I thought we could get started with a bit of background on yourself. How did you end up as Ohio’s 8th district congressman?

Rep. Davidson:

So, I've been a member of Congress for just over four years now. And the district that I live in is Southwest Ohio. It doesn't have either Cincinnati or Dayton as a city center in it, but essentially that corner of Ohio along the Indiana border. And my former member of Congress was Speaker Boehner. So when he resigned in 2015, I was just watching the news, probably like a lot of other people and was thinking “Oh, I wonder who's going to be the next speaker,” but also, “well, I wonder who's going to be my member of Congress.” And so pretty readily, some traditional candidates got in the race. That was September or October of 2015. I started getting invites to a couple of people's fundraisers and then in November, a couple of people stopped in my office to raise money.

And I thought, you know, they asked who I would back in this race. And I said, “well, you guys are the political people. Who's everyone going to get behind?” And they said, “you know, it'd be great if there was an Army Ranger business guy in the race.” We laughed and thought how crazy that would be.

So I went home and told my wife about my day. And she said, “well, what'd you tell him?” I said, “well, I told them it's crazy, because it's crazy:. And she goes, “well, call them back! You'd be great at that.”

So, you know, at the end of the day, we'd looked into what it would take to win. And we basically did it like a product launch. The person who did my campaign had done marketing for the manufacturing companies I had owned. And, we basically just said, “Hey, here's the features of this product.” She's like, “you know, I'm not a Republican, I've never even worked on a campaign.” And I said, “sure, but let's try it.” And it worked. So I won in a crowded primary and then won the office and took office in June of 2016.

HODLpac:

And ever since then you’ve been very active in crypto-related policy. In particular, one of the things you bursted onto the scene with, I suppose, was a high-profile roundtable you and other members hosted on how legislative efforts could help provide regulatory certainty for the industry.

I know you’ve talked about this elsewhere but it’d be great to hear a bit of background on how that came together and what your takeaways from it were.

Rep. Davidson:

Yes, thanks for the question. So, you know, I became a member of the House Financial Services committee in January of 2017 and, you know, people will remember that 2017 was dynamic in this space. I mean, that was the ICO piece, and while there were some good offerings, there were a lot of bad ones and frankly, a lot of fraud. Normally when that happens, you can easily get hearings. But we couldn't get hearings really in depth about that, which was surprising to me, but, you know, h ey, I was a new member, pretty junior member. And so that’s what we went through all of 2017 and, you know, we could only get hearings about, “well, this is what a digital wallet is”, and people were trying to explain how any of this would even work. But not really anything in depth.

We did have a hearing, during that timeframe that kind of exposed some of the companies like Chainalysis that showed that you can actually follow a distributed ledger and frankly, use that kind of analysis to solve things like the Mt Gox issue. So that kind of raised a little bit of awareness, but that's really all we were able to get going. And so that's where the idea of saying, well, I can't schedule a hearing, but I can at least have a meeting.

So I said, let's get this meeting going. We booked a room at the library of Congress, and we were hoping, you know, we'd get a dozen, maybe twenty industry folks to come in and talk with us. And then as the momentum kept building and building, we had to cap it at 50 to make sure people could have meaningful participation.

And frankly, instead of just sending a representative.  Companies sent their CEOs or general counsels, and we had, really, the biggest names, not just in crypto, but in venture capital too and places like NASDAQ, State Street, Fidelity, and other big companies that were trying to deal with custody issues and you know, how to introduce this to retail investors in a way. So it was incredibly well received.

So following that round table we sort of started working together, Rep. Darren Soto and I in particular, on how to craft a bill.

And at the last meeting, Darren asked a good question. He said, “why would this become a partisan issue?” From the participants in attendance and the members on the panel and staff that were there, it was clear that it really had nothing to do with partisanship. It was really whether you actually understood the issue or not.

So we left pretty optimistic that we would be able to spread this out and get some momentum with the legislation. And it took longer than we thought to kind of get the consensus together. And so we said we'll do it then at the start of the next Congress and we'll introduce it as a new piece of legislation. And so we did that and we got a little bit of feedback and said “we'll probably introduce it, you know, in February.”

So this was like a month or two of work. And it didn't really get introduced until I think early April of 2019.

It took a lot of work to get that consensus. And since then, we've had a lot of feedback on the version we submitted in April of 2019. And we have a list of things that we would probably consider amendments, from colleagues and from industry folks and regulators.

And frankly, some of the things would be updated for relevance, because prior to that, we hadn’t seen Libra, for example, and some of the other things that have happened along the way.

But what is clear I think is the need for light touch regulatory clarity, as we've said, not a heavy hand, but frankly, the things that Congress got right in the 90s for the internet we need to get right now.

And it's not because of our laws are so heavy handed that the companies are leaving America to avoid them. They're leaving our country with their investments. They're based here. They have innovative ideas here. A lot of their talent is here. We have the right infrastructure here. But we don't have the framework to do the investment. So they're making their investments in places like Switzerland and Singapore and elsewhere because they have established regulatory clarity on how these assets would be treated.

And frankly, not all the use cases are currencies. That's why we chose “Taxonomy” because the language of the space, frankly, with the origins in Bitcoin in particular go to the heart of currency and sound money.

But what blockchain made clear is that there will be, you know, a nearly infinite number of use cases, much like the internet. So we're in the very early stages of those use cases. And for those things in particular that have no desire to be a currency – in some cases, no interest in even being a payment system –  that are just representing a good or a service and asset of some sort, the clarity is even more important in a lot of ways. So that's why I think the urgency really continues to build know, I really feel like we've missed an important moment and every day we waste is really putting the United States at a disadvantage.

HODLpac:

So, two follow up questions to your answer there. The first is how do you stay on top of industry developments to inform your legislative work - as was the purpose of the roundtable. And second, do you still see the need for the token taxonomy act as it was written back then or have developments in the industry changed your opinion?

Rep. Davidson:

Yeah. So, two things. One, how do I stay on top of it? One way is I spend a lot of time meeting with people and talking with people and market participants, especially. And so you get that firsthand direct feedback and, you know, take the meetings or the phone calls, emails, chats, whatever. And then, I gotten invited to a lot of conferences, whether they're virtual or in person. And then I think the last thing is there's really plenty of good things to listen to, or read in the space. And so whether that's books, podcasts, journals, blogs, is a lot out there – though it's not as mainstream as I wish it was.

But, frankly, even when it got a lot of attention under Libra, because Facebook launched it, unfortunately, a lot of the attention just went to Facebook as the underlying company and not to the actual idea.

And I think the other piece, one of the core issues and why the Token Taxonomy Act is so important is the inherent conflict in this space is centralized versus decentralized. Whether you can have true distributed ledger or you need a central authority and fundamentally that's coming to arise in central bank digital currencies.

And so that got a little bit of traction in, in one of the bills that we considered as a way to improve fast payments to unbanked people during the CARES Act and the response to COVID.

And we had hearings about that in the FinTech task force, and there are a lot of people in Congress who love the essential features of our Federal Reserve system, the Bank Secrecy Act and anti-money laundering, know-your-customer provisions, and what a lot of people feared with Facebook is that they would filter their financial transactions the same way they've started filtering speech or content.

And just like some people really want them to be aggressive in filtering speech or content, there are people that really want somebody to keep them safe and filter all the financial transactions.

And what Bitcoin made people aware of is a system that is permissionless. There is no filter, and frankly, you have a layer of privacy that keeps you safer, right? So you're not worried about your account number, the same way. It’s much less vulnerable, much more secure. And so the biggest thing for those colleagues that I've got in Congress, and frankly, for a lot of people is to say, “look, privacy is not the same as secrecy.” So, go back to the early hearings we were talking about, with companies like Chainalysis, there is a way to use the technology to follow people, but what you don't want is the government, frankly, reviewing every single transaction and saying, “Oh, well, it's okay to do that for these people right now.”

The whole reason a lot of people are unbanked is that there's a sad legacy in history of essentially an attitude that says, “Oh, well, you're not going to bank those people are you?” And over time, those people might change or morph , and you don't really want a system where anyone could say, “you're not going to bank those people.” You want a system that is permissionless. And I think that's the heart of what would make something not a security, no central authority that can alter the value of something. And I think that's the heart of what we must preserve in order to have sound money in our country.

HODLpac:

So, you just touched on a lot of great stuff there that I would love to follow up on. The first of which is: you mentioned the FinTech Task Force… taking a step back real quick, can you explain what the FinTech Task Force is? And I know it's a new creation of Capitol Hill, so if you could please just explain for our listeners and readers what that is.

Rep. Davidson:

Yeah. So the House Financial Services Committee has broad jurisdiction over the entire financial services sector, with the exception of a couple idiosyncratic quirks unique to Congress. For example, the Ag Cpmmittee oversees the Commodity Futures Trading Commission, which isn't really rational because there are lots of different commodities, but that's the way they structured it in Congress.

So with that caveat, broadly, the domain expertise is our committee. And that breaks down into, you know, subcommittees. I'm on Capital Markets subcommittee. For example, some are on Financial Institutions, so on and so forth. Housing and Insurance is another subcommittee. So this is an area that is really focused on: fintech. And there are a couple areas that we're interested in and payments is one of the biggest ones, but, you know, fintech broadly as well.

And then there's another group that's meeting on artificial intelligence and how to use AI for all sorts of things. And one of the things that's gotten a lot of attention is identity and linking that to credit.

And, you know, China's essentially integrating those two to create a social credit score, which is related to a credit score, but different and kind of Orwellian.

So that's, that's the charter for FinTech is to try to have some of your people that really do get the technology and the financial services space and how we need to wade through those. And I think one of the more important things that we're getting to in that is privacy, because that's really foundational to a lot of this, and it's one of the things that's most abridged in the financial services space.

HODLpac:

So, another thing you mentioned in your previous when you mentioned the Fintech Task Force was the recent hearing on the digital dollar and I want to get into that a bit more as I think a lot of themes you just mentioned apply to the debate around that as well.

But before we do that, I was wondering if you could talk a bit about Bitcoin specifically and how you view its role in this larger discussion?

Rep. Davidson:

Yeah. So if you think back to Satoshi Nakamoto, his famous white paper, a lot of the core of that was motivated by the lack of sound money. And Bitcoin has proven itself to be a store of value and I personally look at it like digital gold. We'll see how far it moves from that spectrum but it's a proven a secure store of value. That's the proxy: How confident are you that this is a store of value that's enduring and fungible, right? So you can move it. So those start to look like some of the features that you would want in a currency.

But central banks have a lock on monetary policy. Frankly, we had sound money for a period with Bretton Woods.

The last time the planet had as much debt as we have right now, as a percentage of GDP, was after World War II. And, you know, we went to a sound money policy with the treaty of Bretton Woods. And then in 1971, the monetarists essentially moved us to a free floating exchange rate, sort of a quasi index of a petrodollar in an era where essentially the commodities around the world are ultimately settled in dollars. And so the U S ended up continuing to be the reserve currency around the world, which has provided some stability, particularly for those people that have pegged to the dollar. But you essentially have a unit of measurement, that is part of the measurement system.

So you have a measurement problem with this free floating system, and you see monetary inflation showing up, and, you know, in part by design, right now in a crisis, this is one of the features of central banks that people like, but also one of the flaws. The economy didn't really have its own hiccup here.  It was a kind of a semi controlled reaction to a public health crisis, but it was a decision or a whole series of decisions to effectively close vast portions of our economy and the financial markets reacted.

And the Federal Reserve stepped in and provided a lot of stability. And Congress with fiscal policy shot a lot of money out into the system too, but the moral hazard there highlights the problem. We're not really borrowing this money, we're essentially printing it. So we're diluting the value of everyone else's piece. And that's where if you have a central authority in, um, let's say “a shit coin,” they could just dilute everyone's value, right? And that's one of the problems. That's one of the things why people say this thing is crap because the founders can essentially destroy everyone's value after they've already parted with a lot of money an, do you really want that to be your central bank? Do you want that to be your monetary policy?

So, we need a sound money principle for our country. And the consequences show up in the wealth gap heavily because, you know, your middleclass families and, frankly, your seniors who aren't really highly wealthy, they're looking at going safe. They're not putting their capital into the stock market. They want super safe investments.

And those things have really struggled to find yield because rates have been artificially kept low for all this time, partially to hold down the interest service on the debt. So, there's no yield for savers, right?

And there's no real signal in terms of prioritizing debt as an instrument. What is happening is shares of publicly traded companies are inflated, and you can see that, I like pointing out, for example, not to pick on a company, but Darden restaurants, as an example, they're a holding company for restaurants, their shares drops to about 30% of their pre-market shutdown value at the bottom. And now they're close to where they were before the COVID panic, right? And if you go to any restaurant, including many of the Darden restaurants, the fundamentals aren't there, they're not actually performing like that.

So the real economy, the main street economy is not happening that way. But the market is. And the same problem happens with the debt. If you look at the structured credit market and all the debt that's highly liquid. Part of the reason that there's yield there, it is because you don't have to hold it for 10 years. I mean, no one wanted to hold tenured treasury bills for only one and a half percent. Now they're not even a percent, right? So no one really believes that's reflective of the inflation. That's a negative return, negative real return, adjusted for inflation, to tie this money up. And you don't have that when you have sound money.

And so we need to have a positive rate of yield. And right now people haven't been avoiding investments because the cost of capital was too high. They were avoiding investments because of other fundamentals in the economy. And the banks have heavily propped the system up because they're getting 2% yield on excess reserves with the Fed. They're not putting it into the fundamental economy where the risk takers and entrepreneurs are. You tie that to accredited investor rules, which have hurt early stage companies heavily in this space that we're talking about, that are innovative and want to launch tokenized assets. You've got coders that aren't able to make investments in it because they don't already have a high net worth. And these people are the people that are hurt with monetary inflation.

People look at all the consumer price index. Yeah, that's your traditional consumer inflation. The monetarism monetary policy is creating monetary inflation and it's heavily inflating the assets on wall street. And frankly destroying the value of the assets on main street. And most people's recourses to labor, labor is being heavily hurt by this. And so, I think this is a showing up in our culture where you see socialism becoming more popular, not by people that truly want it to be socialists in the true Marxist sense, broadly, but they see failures in the system. And I think sound money would cure a lot of this and frankly unite a lot of our country. If we could get back to those core fundamentals.

HODLpac:

Back to the recent Fintech Task Force hearing on the digital dollar, we saw a few different views presented there about how the government can use technology to improve the dollar and our payment system, especially when it comes to dispersing funds related to Covid relief.  

How do you balance those two things as somebody who is both on the committee with oversight over the Federal Reserve but is also supportive of Bitcoin and private attempts at digital money?

Rep. Davidson:

Yeah, so if you look at the Federal Reserve, they had something called the Faster Payments Initiative and they wanted funds to clear more quickly and people to be able to move money. If you look at your normal bill pay in your account, it takes days. The old checking system took days, the whole netting system versus gross, which gets in the weeds. Maybe some people are following with regards to how the banks settle.

But there was this desire to improve the payment system. And so the Fed for a long time said, “we're not going to get into that space.” So now, after, you know, people have invested literally tens of billions of dollars in this space in the last year the Fed has said, “Oh, we're going to look at the fed operating this.”

Well, part of it is they're losing the return they get on a check clearing, for example, so they want to find sources of revenue for the Fed, but another part of it is they want control. And a lot of people do really like this central authority, controlling things. I have highlighted why that's problematic and I will continue to. And so, but you know, if you look at the era we’re in, where the world needs digital money, right? I mean, the planet, frankly, hasn't all the way caught up to where the internet era has moved us and blockchain provides a great way to do that. Now, some people want to keep all the flaws, in my opinion, of the current system. And somehow they believe that it's going to produce this great new system, but I don't. It'll just poison any new system with all the same flaws that make the current system, you know, inadequate.

So, that was the difference of opinion amongst colleagues and commentators all over. But, you know, what makes America, America is things like the Fourth Amendment, our Bill of Rights, where we say, you can have an expectation of privacy as an American, and right now you really have no expectation of privacy in your financial matters, unless you're in cash, right.

And some of my colleagues will point out that the only reason that you would want to defend cash or cryptocurrencies like Bitcoin, that are truly decentralized distributed ledger products, is to evade taxes or launder money, or sometimes even more insultingly to say, “well, you're only doing that so that it helps terrorists”. And, like, I was an Army Ranger, are you kidding me? It's incredibly insulting. And it's meant to be but they want to have control over this.

And I think that that has privacy problems. It has security problems and frankly it has efficiency problems. Lastly, when you have control, just like shitcoins, somebody wants to use that power to help themselves or their friends. And, so you have to have a system that can't be corrupted in that sense. And we know that that humans fail. So you’re going to have to have really good institutions that are populated with really good people, consistently, and with a high level of accountability, none of which applies to the current Fed in the sense of level of accountability. They're there and they're not accountable in a way. I mean, Chairman Powell comes and speaks with us once or twice a year, he's available from time to time for conference calls, but there's not real transparency at the federal reserve.

And there's not really accountability for the policies that they're implementing. So, you know, we need a fundamental change in our central banking policy in the country. And frankly, globally, but especially in the United States, that's my concern. And if we get that right, then I think – this is the thing, we've had periods in our history where we've gotten it phenomenally right. And those periods have made America the world's land of opportunity. And we've continued to be that land of opportunity in spite of all kinds of flawed policies, on a host of issues. And, you know, our founders said “towards a more perfect Union, in order to form a more perfect Union.” So, we're a long ways away from it. I think we're especially long ways from it on our monetary policy. And I love the idea that blockchain can help, if we do it right and we do it in a permissionless way without a strong central authority.

HODLpac:

Great, I really like your point there about remaking institutions going forward and I agree blockchain and crypto have a role to play there. One of the motivations behind HODLpac was to provide a venue for the crypto community – which is generally, I think, very interested in the idea of re-building institutions using this new technology – to interface with DC on how to do that.

You were recently a signatory on a letter to the treasury department about using blockchain and AI to improve government processes, namely making them more transparent and increasing accountability. Do you view initiatives like that as an introduction to those in DC about the potential for crypto and blockchain technology? First as a way to improve processes and second as a way to rethink them.

Rep. Davidson:

Yeah, I do. And I think it's important one. We'll push on Congress, but too, when you push on the executive branch, a lot of times executive branch can move more swiftly. I mean, that's been one of the reasons Congress has continued to kind of lose its authority and continually struggles to solve problems. But a lot of times you do push more and more into the bureaucracy and expect the agencies to kind of go through the rulemaking process. And sometimes they have come up with great innovative solutions. And as an example, the Department of Defense has really struggled to pass an audit. They have a hard time accounting for all of the money that's appropriated to them in a given year. And one of their reviews where they failed the audit, they couldn't account for $128 billion out of about $700 billion that they had been appropriated.

And if you could imagine a publicly traded company who couldn't pass an audit, they would be delisted, right? And if they had that kind of a lack of ability to account for that kind of level of funding, I mean the whole board would not only be terminated but people would probably be going to jail, right? But we don't do that with some of our government agencies and blockchain really provides a solution for that. A real distributed ledger would show every move and some of it frankly, would be classified and you could have a private blockchain for the classified portion and go to incredibly great lengths to secure that private blockchain. So even the public piece would have private keys. So there, there could be a massive improvement just on the accounting for appropriations, if the Office of Management and Budget started moving everyone to a blockchain-based accounting system.

So you could do that across the board. And that's just one use case and just like I said about the internet: people are going to continue to come up with use cases all over the place. And we have some really talented people that have committed to serve the government, in all the agencies, and I trust that they may be able to have some of their creativity unleashed and would love to see them come to us and say, “Hey, we need this.”

And I think another area, if you look at use of things like FinCEN that is frankly watches all the financial transactions just to keep us safe. They help us catch bad guys, stop terrorists, prevent tax evasion, money, laundering, fraud, all kinds of things. They could really benefit from some investment to keep up with where this technology is going.

HODLpac:

And finally, for our last question, we know that members of Congress - even ones like you who pay lots of attention to crypto - have many more things going on. So what are some of your other legislative priorities for 2020 and beyond?

Rep. Davidson:

Yeah, so I’ve talked a lot about privacy, for example. And so Zoe Lofgren, a member of Congress from California, and I successfully moved the needle on the debate for FISA reauthorization. We were going to get a really bad bill. We had a system of reforms that united progressives and conservatives and they had to pull the main bill from the judiciary committee. Ultimately, the people that want to keep spying on Americans are in a position to continue spying on Americans. The President's threatened to veto that. And I think frankly, there are people across the political spectrum that want him to, maybe some for different reasons. But, fundamentally, warrantless surveillance of American citizens is wrong. And unless we build a broader coalition to do that, we're going to see the status quo preserved there. A lot of that goes into the financial services space, but it's foundational, it's the Fourth Amendment.

And I spend a lot of time on civil liberties issues. I'm working on a Defend Freedom Act that goes through preserving the full bill of rights. As States responded to COVID-19, you saw some States stifle speech, the press, religious access, to any number of things. There were some pretty spooky provisions on ways to go about contact tracing. We have ways to do it right now for all sorts of diseases that are HIPAA compliant. So, you see a lot of things there with civil liberties. You see a lot with capital markets and how to increase growth in our economy and lower barriers to investment, working to get rid of the accredited investor rule.

And I'd say the last thing is just basic solutions. So with the CARES Act, we spent a lot of money, in states and frankly just about everywhere, we spent a lot of money. But States and local governments have more money than they can spend right now on COVID direct expenses, for good reasons. You know, it wasn't as bad as we feared. And people will always question why is that? But the reality is they have more money than they can spend by December 31st on COVID-specific expenses. But that was the way it was appropriated. So when we talk to local officials, our governor on down through local officials, if they had more flexibility for of the money that's already spent, they're going to need that, whether there's more money appropriated later or not, so they can make use of it. So a lot of just basic solutions to those types of problems.

HODLpac:

Congressman, thanks so much for your time today. It was great chatting with you and hopefully we will see you again soon.

Rep. Davidson:

Thanks for covering it and really appreciate your support and interest in the space.