Is there a coordinated campaign to attack crypto?

Jan 28 2022

Well, that was quite a week.

When I woke up on Monday I had no idea it would be like that, but here we are and it’s not over yet, though we can see the finish line. We just need to keep pushing and not let up until it is clearly fixed.

Related to all that, I keep getting asked if what we are seeing lately is a coordinated campaign to attack crypto. Congress keeps sneaking in crypto-hostile provisions in priority bills, mining is getting elevated scrutiny, the White House is preparing an Executive Order focused on crypto regulation, the SEC just published a proposed rule that (without mentioning crypto) seems targeted at DeFi, and just yesterday Decrypt reported on a supposed administration strategy to curb stablecoins and hand over the industry to banks.

Let me address the Decrypt article first since I was quoted in it and I want to make sure folks don’t think I endorse the whole sweep of the piece. The idea that the “Biden Administration is pursuing a crafty strategy to tame an industry it views as a threat” is one way to put it. Another way to put it is that the laws on the books are being enforced, whether we like those laws or not.

As I say in the article, the tenor of the conversation in DC started to change with the announcement of Libra. The reason for that is that Libra’s perceived potential scale, combined with antipathy for Facebook, made folks on all sides and at all levels scrutinize the scheme the way they don’t scrutinize any old new crypto firm or project. What they found, among other things that concerned them, was that Libra inadvertently or not was proposing to issue a security in the guise of a stable value coin. This led them to look at the wider stablecoin market and what they found were stablecoins that are essentially securities or things that look very much like bank deposits but being offered by non-banks. Given the growing size of the market, they got to work enforcing the law, and very slowly at that (between Libra and the toothless President’s Working Group report two and a half years passed).

So, what financial regulators are beginning to say is, hey if you’re going to engage in these kinds of deposit-taking activities, then you’ve got to be regulated as a bank, and if you’re not, we don’t see how you’re not offering a security. That regulators would seek bank regulation for stablecoin issuers shouldn’t be surprising (indeed it wasn’t to the likes of Paxos and Gemini, which from day one got state trust charters to issue their coins; Paxos now has a federal charter too). Do you call that a “Plot to Hand the Crypto Industry to the Big Banks,” as the Decrypt article is titled? Or is it just slow, boring, obvious enforcement of (however-imperfect) existing law to a fast-moving industry? I’m not saying it’s good, I’m just saying it’s not a conspiracy.

I’m also not saying it’s fair, and that brings me to a point I’ve been making on Twitter and elsewhere over and over again. I’m quoted in the article this way:

According to Brito of Coin Center, the legal status of stablecoins is more akin to the money used in PayPal or Venmo transactions. In such transactions, customers don’t send actual dollars to each other but rely on companies to debit or credit their accounts using internal funds. A dollar sent via Venmo, or a stablecoin, serves as money, but that doesn’t mean it’s treated as an investment overseen by the SEC.

My point, however, isn’t that because stablecoins and PayPal are functionally the same thing, and because PayPal today isn’t regulated as a bank or by the SEC, then stablecoins cannot be either. To the contrary. My point is that if stablecoins are securities or must be bank-issued, then I don’t see why PayPal and the like shouldn’t be as well. If the products present the same risks, as I think they do, they should be no distinction in how they’re regulated, and I’m not sure securities regulation or piecemeal and diverging state-by-state regulation is the way to go.

So, back to the original question: Is there a coordinated attack on crypto being waged by the powers that be in Washington?

Well, again, that’s one way to look at it. Another way to look at it is that one year ago we went from having a Republican executive branch to a having very progressive administration with Democrats controlling both houses of Congress. And one year is about how long you’d expect it to take for a new administration to get in the groove of things and really start executing on policy it’s been developing.

In many ways, crypto is a victim of its own success. It has a gotten incredibly big, which in general I’m very happy about. But that also means it’s going to naturally draw a lot more scrutiny than it did a decade ago when it was on no one’s radar. Combine that with an executive branch and a Congress that focuses more on possible risks than potential rewards, and that embraces the precautionary principle, and you shouldn’t be surprised to see the amount of incoming that we’re seeing.

Is this all “coordinated”? I mean, I guess to the extent that there’s interagency coordination, but really I think the perception of coordination goes beyond that. I think what people sense as a plot is actually just a threshold being reached. Crypto has crossed a threshold, for better and for worse, and so there’s just an emergent zeitgeist that leads to a lot of attention, both positive and negative.

None of what I’m saying should be seen as downplaying the challenges we’re facing. It’s just to say that while it’s tempting to think that crypto represents a heroic and existential threat to powerful forces that recognize the threat and have developed a cunning master plan to destroy it, what I know of government and Occam’s Razor leads me to believe that the more likely explanation for the ills that currently befall us is that the tectonic plates of crypto and the federal government, which have for some time been approaching each other and even touching here and there, are finally, in a real way, slowly beginning to collide.

That all said, we’re just going to have to work harder than ever and devote more resources to policy and politics and litigation than we’ve had to, and the good news is that it’s being done. I have no way of accurately measuring this, but my sense on the ground is that the number of people working full-time on crypto policy or lobbying has grown at least 10x over the past twelve months. The amount of political giving has also similarly exploded, exemplified by the announcement today by CMS and of a $20 million crypto-focused PAC. Big litigation is also coming. This is spontaneous order in D.C. I’m afraid.

The other good news is that the federal government is not as omnipotent as we like to fear. Consider the executive order that we expect in a week or two. Here’s how Bloomberg describes it:

The proposed directive would charge federal agencies to study and offer recommendations on relevant areas of crypto -- touching on financial regulation, economic innovation and national security, said the people, who asked not to be named discussing plans that are still under consideration.

The initiative will also aim to coordinate agencies’ work on digital currencies throughout the executive branch, the people said. The plan would push departments that have given scant attention to crypto to focus on it. Officials have also considered appointing a White House crypto czar to act as a point person on the issue, one person said.

So, it’s a coordinated plot to. . . “coordinate agencies’ work” and “study and offer recommendations”? I have no idea what’s in it, so I don’t want to get too comfortable, but it’s not going to surprise me if (much like the PWG stablecoin report) this order is about coordinating and studying and getting ducks in a row, not about big policy shifts, especially since some of the most on-point agencies are independent and the White House can’t just boss them around. It’s also going to be about telling the likes of the CFPB, FTC, Commerce, maybe even EPA, to look at crypto, which they basically haven’t done at all. In some ways this might not be bad at all; for example, there are a ton of crypto scams that rightfully deserve CFPB and FTC scrutiny. And as for a crypto czar, who knows, if one’s appointed it might even be someone that gets it. Cross your fingers on all this.

Why does it seem like Congress keeps trying to sneak in anti-crypto provisions in unrelated, massive, “must-pass bills”? There’s nothing deliberately nefarious about this. Here’s how I explained it to Vice this week:

"Because of how politically divided Congress is, the way that anything passes Congress are these giant must-pass bills,” Jerry Brito, executive director of Coin Center, said in an interview. “Some bills to rename a courthouse or rename a post office pass, but anything of substance does not pass on its own. It passes when it's attached to some massive must-pass bill like the infrastructure bill or the National Defense Authorization Act, which funds the military."

Again, the only thing that passes Congress today are massive bills to keep the lights on (which is why they’re called “must-pass”) and the only way you get any little bill you’ve been sitting on passed is to get it attached to one of these big unrelated ones. Let me be clear: this is a disaster and it leads to things sneaking through without getting the scrutiny that would accompany a bill going through regular order. This is why whenever one of these massive three-thousand-page bills is published we have to scour it for stuff that would affect crypto and, when we find something, scramble to get it fixed before the bill passes. It sucks, but it’s not a completely deliberate ploy by congress to sneak things through because it’s not as if there’s a real alternative way that small bills can get passed.

As for the letter that Elizabeth Warren (and seven other members of congress who are not getting any headlines) sent to miners demanding an unreasonable amount of business information and, essentially, asking them to justify their completely legitimate use of energy, the miners should take a page from the playbook of other tech companies who’ve received such performative letters from Congress and respond in length and politely but offer no information they don’t want to. Elizabeth Warren is one senator and, while they should certainly be respectful, they don’t have to justify themselves to her. In less than a year it is likely she will be in the minority in the Senate.

And as for the proposed SEC rule that seeks to expand regulation of exchanges to include “making available a communications protocol for expressing trading interests” is a big deal if it is what we think it is. The good news is that it looks like a total overreach, but I’m going to save that for the next missive when I’ve have a chance to look at it more closely.

Have a good weekend.

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