After Defeat, Crypto Lobbying Enters High Gear

After Defeat, Crypto Lobbying Enters High Gear

5 months ago

With highly-debated infrastructure bill now signed into law, what's next for crypto lobbying in Washington?

After Defeat, Crypto Lobbying Enters High Gear

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The $1 trillion infrastructure bill U.S. President Biden signed into law on Nov. 15 may be a boon for the wider economy, but it’s a stinging defeat for the crypto industry, which has only recently been ramping up its lobbying operations in Washington.
Despite a last-ditch campaign to amend it, the legislation increases Internal Revenue Service (IRS) scrutiny of cryptocurrency markets by expanding the definition of brokers who must report transactions to the tax authority.
Aiming to make the bill budget-neutral, the added enforcement seeks to garner $28 billion over the next decade from an industry that regulators often liken to the “Wild West.” The crypto industry and its allies in Congress are concerned that the bill’s hazy definition of "brokers" is so broad that it could apply to nearly every actor in the system, from miners to programmers.

It wasn’t supposed to end like this.

According to data from the Center for Responsive Politics, the decentralized crypto industry — known more for libertarianism than political organizing — poured $4.9 million into lobbying efforts through September of this year. That’s more than double its effort in 2020.
Just this month, the Blockchain Association hired Dave Grimaldi, a former aide to House Majority Whip James E. Clyburn (D-SC), as top lobbyist and Jake Chervinsky, a crypto legal expert, as Director of Policy.
In July, Chervinsky had sounded the alarm about the draft infrastructure legislation, writing on Twitter, “this is not a drill.” Yet, despite a grassroots campaign of more than 40,000 calls to Congressional offices and 10,000 #DontKillCrypto Tweets (spearheaded by digital rights group Fight for the Future), the bipartisan lobbying push fell flat.

What’s Washington Saying About Crypto Now?

Regulators in Washington have given mixed messages about the extent to which they intend to oversee crypto markets.

A general distrust of the area pervades officials’ rhetoric, with Treasury Secretary Janet Yellen defending the beefed-up IRS rule as necessary to get “insight into opaque sources of income.”

Federal Reserve Chairman Jerome Powell caused a stir over the summer when he signaled the Fed’s interest in establishing a U.S. central bank digital currency, or “Digital Dollar,” a move investors feared would bring with it a raft of controls or even a ban on cryptocurrencies. When Powell told a House committee in September that he did not intend to ban crypto, the price of Bitcoin surged over 10 percent.

Nonetheless, following the lead of the Biden Administration, the Federal Reserve and other regulatory bodies are working to establish an approach to cryptocurrency that will impact how stringently the IRS interprets the new "broker" reporting rules, among other issues.

Lawmakers are also starting to take notice. According to a recent Pew survey, 16 percent of Americans have invested in cryptocurrency, fueling concern on Capitol Hill about consumer protection. Since 2016, the bipartisan Congressional Blockchain Caucus has become a target for lobbying efforts. After Ron Wyden (D-OR), chair of the Senate Finance Committee, led efforts to strip the reporting provision from the infrastructure bill, a group of crypto executives thanked him with a campaign fundraising event.
One of the flashpoints between federal regulators and the industry is stablecoins. Crypto instruments pegged to the value of fiat currency, these digital tokens resemble other fixed assets in ways that arguably make them subject to existing regulations, according to some.
SEC Chairman Gary Gensler has quipped that he views stablecoins as “poker chips at the casino,” adding that he doubts the “long-term viability” of cryptocurrencies. The SEC simultaneously threatened to sue Coinbase over a proposed lending program that would enable investors to earn interest on their digital assets. Coinbase CEO Brian Armstrong complained on Twitter that “the SEC was the only regulator that refused to meet with me.” There’s “some really sketchy behavior coming out of the SEC recently,” he wrote.
On Nov. 1, a long-awaited joint-federal-agency report called on Congress to “act promptly to enact legislation” to regulate the sector, arguing that “legislation should require stablecoin issuers to be insured depository institutions.” The Blockchain Association responded with a statement calling the report “problematic in that it could create a regulatory moat around certain stablecoins at the expense of others, and provide larger incumbents like big banks with a competitive advantage in this space.”

How Has the Crypto Industry Reacted?

Keen to build trust after the infrastructure bill defeat, crypto industry leaders have been careful to position themselves as constructive partners in building a new regulatory framework.

Even Coinbase, on its blog, proposed creating a regulatory body to deal with crypto markets. Two of its founding investors, Andreessen Horowitz and Ribbit Capital, had already launched the Crypto Council for Innovation (CCI), an industry group backed by a major partners like Fidelity and Square as well as Coinbase. The Council emphasized that crypto can facilitate “a more inclusive, accessible financial system,” a theme echoed by other organizations. The DeFi Education Fund says it aims to “educate policymakers about the benefits of decentralized finance.”
This emerging ecosystem of advocates strives to give a public voice and face to an historically leaderless, hierarchy-averse community. Digital activists have begun joining with established players to fund these organizations, using creative mechanisms like philanthropic NFT sales to harness the capital of dispersed crypto traders concerned about creeping regulation. The DAO minted 10,000 cartoon lobsters in a light-hearted push to fund the work of DC-based crypto policy nonprofit CoinCenter. Following their sale, the DAO donated what amounted to three times the Center’s current annual budget of $1.3 million.
As the lobbying effort grows, the industry’s money will likely flow into areas beyond the Beltway, including election campaigns. A 2014 decision by the U.S Federal Election Commission permits Bitcoin contributions, although watchdogs have sounded an alarm that crypto’s anonymity can make it a tool for circumventing campaign finance laws.
All these efforts are still in early stages. As Kristin Smith, executive director of the Blockchain Association, said in a recent interview, “the infrastructure bill debate in August really was sort of a wake-up call to the crypto industry that they need to constructively engage in Washington."
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