For years now, a fight has been brewing in the US over how to regulate the crypto industry.
The industry wants to build the technology in a decentralized manner, while the regulators, whose regime typically is designed around a system with intermediaries, seem to want to keep them in place.
Meanwhile, entrepreneurs and companies have either moved out of the US or are threatening to, or they’ve launched products (which, in crypto typically means either free or easy money) to other jurisdictions, while excluding Americans. (In fact, last week, Coinbase launched a yield product in 70 countries but excluded the US. More on that later.) For their part, regulators accuse the industry of doing things that could destabilize the financial system or that simply enrich the already rich.
However, last week’s hearing about crypto in front of the House Financial Services Committee showed that there’s been a sea change, at least amongst lawmakers in the House, that could play out even further during the midterm elections next year.
To put it bluntly, although crypto hasn’t necessarily emerged as a partisan issue, certainly the more vocal supporters among the Congressional set have tended to be Republicans, while the more prominent critics tend to be Democrats. And it looks like at least some up-and-coming Democrats are going to take another tack and use the considerable new wealth in crypto to their advantage. Whether or not that will bring about regulatory changes, however, remains to be seen.
“[The hearing] was definitely much more positive than in previous instances. There was a lot of more openness and less backlash,” said Collins Belton, founding partner at Brookwood P.C. “It was very interesting to see — more on the progressive side — the shift to inquiring about the technology in some of the dimensions I hope this trends — anti-trust, composability.”
Part of the reason for the shift may have been the crypto industry’s full-throttled opposition to a vaguely worded crypto provision in the infrastructure bill that made its way through Congress this past summer and fall. Being on the receiving end of so many calls from constituents and industry participants and lobbyists may have given the House Representatives an education that produced a more nuanced view of crypto.
Belton also noted that at least one challenger to a Democratic incumbent was capitalizing her opponent’s anti-crypto stance. When Rep. Brad Sherman of California was going on a tirade against crypto that included a reference to “mongoose coin,” which later became a meme, his primary challenger Aarika Rhodes tweeted, “Congressman Brad Sherman wants to ensure our country is last in line to benefit from all of the innovation that is occurring in the cryptocurrency industry. It’s time for new leadership. #Bitcoin”
The next tweet in the thread was a link to her donation page. Responses to her tweets included ones like this one from someone whose Twitter name was “Bitcoin Grandma:" “I donated to your campaign after watching Brad Sherman’s performance today. He obviously does not do his homework. You got this!”
Jake Chervinsky, head of policy at the Blockchain Association, said part of the shift seen last week is, “Members of Congress are realizing within the last 12 months that their constituents care about crypto and are using this stuff and don’t want to hear the same incorrect misinformation all the time.” Plus, Chervinsky says that the concept of Web3, of a decentralized internet not dominated by a few big tech giants, resonates with them.
“House Financial Services Committee have been concerned and worried about big tech, which has been trying to take over finance,” he says. “I think they really like the idea of these systems that we’re building that give power away to the users and take power away from these multinational tech giants.”
While the House at least seems to have adopted a more positive stance on crypto (a shift that has yet to come to the Senate, as seen in this week's Senate Banking Committee hearing on stablecoins), it remains to be seen how that will affect regulation. Belton says of the crypto industry’s current nemesis, SEC Chair Gary Gensler, “He’s a non-elected official, so he’s insulated from the political pressures that are emerging and shifting and how the crypto industry is becoming part of the political class.”
However, Belton also noted that since the legislators are elected, if they begin to think regulators are interpreting the laws incorrectly, it could portend a change. While he says it’s too early to say things are trending that way, if crypto becomes a bipartisan issue, then it would be harder for any regulator, such as Chair Gensler, to go their own way.
The very next day, in fact, gave prime ammunition to those opposed to the way Gensler appears to want to regulate crypto in the US. Coinbase, which seems to have had a fraught relationship with Gensler since he began his tenure this year, launched a DeFi yield product in 70 countries but excluded US customers. Earlier this year, the SEC had threatened to sue Coinbase if it had launched a similar product it had been planning to roll out, called Coinbase Lend.
Belton called it “an insane outcome” for a US company to have financed the development of something “but then the benefits of their products are accruing to non-Americans. That narrative will not hold. And it gives people a rallying cry.” On top of that, he added, people weren’t going to feel very “protected” if their only option for yield is the bank giving them 0.5% interest vs. Coinbase’s DeFi product, which will offer in the range of slightly less than 3% to a bit over 5%.
“This isn’t about some obscure governance token or a highly volatile asset,” Chervinsky adds. “This an investment product involving US dollars that will yield a few percent a year — less even than inflation. This isn’t some crazy high-yield investment product. The more the SEC stops these products from being offered in the US, the more people will get upset, the more lawmakers will say, what are you doing, when you say you’re protecting investors but really what you’re doing is protecting them from making money?”
As mentioned earlier, already some Democratic challengers are bucking the trend of some of the more prominent (and senior) Democrats who are critical of crypto, such as Senator Elizabeth Warren, Secretary of Treasury Janet Yellen, and Gensler.
In addition to Rhodes, a Senate candidate in Ohio, Morgan Harper, has staked out a pro-crypto stance, despite having a background that would put her more in line with the likes of Senator Warren. The consumer protection attorney and community organizer who was also a former senior policy advisor to the Consumer Financial Protection Bureau, the agency whose founding is credited to Senator Warren, recently tweeted, “If you're worried about fraud/scams, the priority shouldn’t be crypto it shld be on our current financial system … If a lot of the predatory & illegal behavior conducted in the existing financial system is because of concentrated corporate power among large financial institutions, then a system that is decentralized & uses technology to create transparency has the potential to cut down on some of these abuses and increase alignment amongst customers, builders and capital providers.”
Many replies were from Twitter accounts with NFT profile pics or with “BTC” or “.eth” in their names indicating they are crypto people, lauding her views and some saying they were Ohioans who intended to vote from her.
Belton believes that with up-and-coming Democrats seemingly catching on to the power (and money) of the crypto electorate, the midterm elections next year could be pivotal for crypto. “The next three to four months will be quite telling,” he says. “Already, we’re starting to see that narrative shift on the left. The big political story to be following will be the tenor of the Democrats over crypto the next three to four months.”
On the flip side, he cautioned, even if the Democrats remain more on the anti-crypto side and the midterms go the GOP’s way, that won’t mean “kumbaya for crypto,” says Belton, noting how, as some members of the Trump administration were on their way out last year, they tried to push through rules that were vehemently opposed by the industry and community.
So, at this point, crypto regulation is still a contentious issue in the US, with the industry questioning whether or not it even makes sense to apply regulations made decades ago to this nascent technology. At the same time, at least among lawmakers, it is not yet a partisan issue, nor a bipartisan one.
That means whether existing regulation will stay or new regulation specific to crypto will be adopted remains to be seen. But certainly, next year’s midterm elections could give an indication as to where the fight over crypto regulation in the US is headed.
If you're interested in learning more about crypto: