Crypto Goes to Washington

To the untrained ear, Hester Peirce’s comment sounded anodyne, but everyone in the audience knew what she was doing: selling out her boss. “It’s fairly clear,” the U.S. Securities and Exchange commissioner said from the Washington conference stage, “that we’ve been taking an enforcement-first approach in an area where we should be taking a regulatory-first approach. I think we’ve got the balance wrong right now.”

Peirce was speaking at the D.C. Blockchain Summit in May, to an audience of the cryptocurrency faithful. Outside the auditorium, geeks, lobbyists and investors mingled in a cavernous converted warehouse. “Trust is non-fungible,” read a banner for the accounting firm Deloitte, hung from a balcony where the company was sponsoring a lavish spread of snacks. Most attendees were done up in D.C. drag—conservative suits and dresses, more boardroom than Burning Man.

The message was clear: crypto has arrived in Washington. With more than 800 attendees, the summit was the largest ever hosted by the Chamber of Digital Commerce, a trade association representing blockchain companies. In prior years, the conference was co-sponsored with Georgetown University and had a sleepy, academic feel, with panels devoted to explaining or making the case for a technology that still seemed obscure. This year, its attendance and square footage had more than doubled from the last time it was held in 2019. “We’ve gone from ‘Is this magical internet money for real?’ to ’No question, this is definitely a thing,’” the Digital Chamber’s founder and president, Perianne Boring, proclaimed from the stage.

The industry has spent the past year making a major play for D.C.’s attention and affection—a sea change for the utopian technology, with its animating vision of frictionless, borderless, intangible exchange. Bitcoin has been around for more than a decade, but until recently the rapid growth of an industry valued at $3 trillion at its peak has operated at arm’s length from the government—an arrangement that seemed to satisfy both sides.

Now D.C. has moved into crypto’s territory, with regulatory crackdowns, tax proposals, and demands for compliance. And crypto has pushed into D.C.’s terrain, standing up multiple trade associations, think tanks, and political action committees and hiring hundreds of lobbyists. “The industry has gone from 0 to 100 in record time,” says one D.C. consultant who advises crypto and other tech firms and has seen business skyrocket in the past year. “Even small companies have some footprint now. The venture capital firms are stacked like cordwood with former regulators.”

A collision is under way—not just the usual maneuvering between government and business, but a clash of radically different cultures. To crypto’s whiz-kid techno-futurists, the stodgy pencil-pushers of the Washington bureaucracy are nothing but a hindrance. To Washington’s straitlaced rule-makers, crypto’s wild, utopian promises are merely cover for dangerous fads and scams. The still-unknown potential of an ephemeral new technology has run up against the power of the state, and neither quite understands how the other works.

How it shakes out will have major implications for the future of the economy and technology in America and the world. Right now, cryptocurrency exists in a legal gray area, scarcely mentioned in federal code. That has left financial regulators to try to interpret definitions created for ordinary markets and apply them to a nascent technology. The most prominent such dispute is over whether cryptocurrencies and related products should be categorized as securities—investments, like stocks and bonds—or commodities, interchangeable assets like oil or grain.

At stake in the definition is whether crypto entities are regulated by Peirce’s agency, the SEC, or its smaller sister agency, the Commodities Futures Trading Commission (CFTC). Both agencies have asserted jurisdiction without issuing any official guidance about where they believe the lines ought to be drawn. SEC Chairman Gary Gensler has stiff-armed companies that try to ascertain their status, only to turn around and sue them for failing to comply with securities laws. This is the “enforcement-first approach” Peirce was describing, and it has drawn loud complaints and major lawsuits from the crypto industry. (Gensler, appointed by President Biden, isn’t technically the boss of Peirce, appointed by President Trump, since commissioners are independently appointed and confirmed, but he is her superior; differences of opinion are common on the bipartisan panel.)

Gary Gensler, chairman of the Securities and Exchange Commission, has drawn the ire of the cryptocurrency industry for his tough stance (Melissa Lyttle—Bloomberg/Getty Images)

Gary Gensler, chairman of the Securities and Exchange Commission, has drawn the ire of the cryptocurrency industry for his tough stance

Melissa Lyttle—Bloomberg/Getty Images

The inter-agency pissing match is the subject of endless speculation and argument among crypto people, but it’s important less in its particulars than what it signifies: would-be crypto innovators who are not trying to scam anybody have no way to be confident they’re following the law. Industry advocates warn that the resulting confusion not only hurts consumers but also damages a sector that acolytes say holds the keys to a technological revolution akin to the invention of the Web.

U.S. crypto companies want to comply with the law, the industry says, but instead have been bankrupted or driven offshore by regulators’ approach. “We need a definition of which digital assets are securities or which ones are not,” the Digital Chamber’s Boring says in an interview. “The SEC has said, ‘We’re not going to tell you which ones meet our test, but make no mistake, we will come after you if you guess wrong.’ We have companies that want to be regulated, but they need to know who the regulator is, and if they are going to be regulated by the SEC, they need to know how to register. A lot of projects are in complete limbo today, and it has forced a significant amount of business activity outside of the United States, because they’re not willing to operate in a gray area with potential enforcement hanging over their head.”

D.C. is beginning to listen. On Sept. 15, the Senate agriculture committee held the first hearing on the Digital Commodities Consumer Protection Act, a bipartisan proposal coauthored by Senators John Boozman and Debbie Stabenow. The bill is one of numerous crypto-related pieces of legislation introduced on Capitol Hill in recent months—Boring counts more than 60, with more in the process of being drafted. Meanwhile, on Sept. 16, the White House released its first-ever framework for crypto regulation, a follow-up to a first-of-its-kind March executive order in which President Biden directed agencies to research and report on the matter. The Blockchain Summit’s program featured four senators and three members of Congress, almost evenly divided between the parties.

The industry says it wants rules it can live with; policymakers say they want to protect consumers and foster innovation. Those goals would seem to be compatible. But this is D.C., where finding common ground can come with its own costs. “When politicians say, ‘We hope to get this done by the end of the year,’ what I hear is ‘We want crypto lobbyists at our next fundraiser, and we’re going to milk this for at least three Congresses,’” a veteran D.C. tech lawyer says, speaking on condition of anonymity in order to be frank about how Washington really works. As soon as the law gets passed, the spigot of money turns off, or at least down. “It’s worth noting,” the lawyer says, “that in the California gold rush, the folks who supplied the picks and shovels and donkeys made a lot more than the miners.”

There’s a common saying on Capitol Hill: if you’re not at the table, you’re on the menu. The crypto industry discovered this principle in remarkably literal fashion last year.

In August 2021, a bipartisan group of senators was negotiating infrastructure legislation to fund roads, bridges, and broadband across America. To pay for all this, the senators consulted a “menu” of revenue options staff had prepared. Among them was a tax on cryptocurrency brokers that would raise an estimated $5 billion. The lead Republican negotiator, Rob Portman of Ohio, picked it off the list, sources familiar with the process confirmed.

Crypto firms who would be affected by the provision were blindsided and scrambled to mount a response. The unexpected fight stalled the bill’s passage as exhausted senators worked around the clock to finalize the legislation. Lawmakers sympathetic to the industry proposed a compromise, but just when one seemed imminent, Republican Senator Richard Shelby of Alabama nixed it to protest the blockage of an…

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