The crypto industry in 2023 is a hotbed of innovation akin to the early days of the internet. However, the regulatory environment surrounding it seems to be getting less favorable every day. This emanates from the Biden Administration and the administrative agencies of the Executive Branch. But there is little more than a year left in President Biden’s term. The next year will be dominated by the upcoming 2024 U.S. presidential election, in which many of the candidates are likely to address issues surrounding the crypto space in their campaigns. How regulations are interpreted and enforced can greatly influence the future of the space. This post covers the key issues likely to be addressed, pro-crypto presidential candidates, key elected officials and regulators, and crypto advocacy groups.
Current Political Issues
Operation Choke Point 2.0
There is an ongoing concerted effort by the White House, financial regulators, and the Fed to both deter banks from providing services to crypto companies and to shut down efforts by crypto firms to obtain bank charters. While this has been the case for years, financial regulators’ anti-crypto campaign came to a head in 2023. In January of this year:
- The Federal Reserve, the FDIC, and the OCC released a statement on “crypto-asset risks to banking organizations”
- The Kansas City Fed denied crypto firm Custodia’s application for a master account, citing “safety and soundness risks,” despite Custodia’s plan to be a “narrow bank” with 100% reserves.
- The Fed issued a policy statement discouraging banks from holding cryptoassets or issuing stablecoins.
- National Economic Council released a policy statement that emphasized the supposed risks digital assets pose to the banking system.
In February, the Department of Justice announced an investigation of Silvergate Capital, the most active bank in the crypto space, over its dealings with FTX. A month later, on March 8th, Silvergate announced its plan to wind down operations, voluntarily liquidate its assets, and make its depositors whole. While it’s true that Silvergate, like other banks, was beset with problems caused by the rising interest rate environment, the federal government’s regulatory pressure was a major contributing factor to its demise. In particular, the Federal Home Loan Bank’s mysterious and abrupt refusal to provide advances to Silvergate (a common way for banks to obtain liquidity) in early March was the final act that killed the bank.
Later in March, in the midst of the response to the Silicon Valley Bank run, the New York Department of Financial Services put Signature Bank– the sole remaining large bank publicly servicing crypto firms–into FDIC receivership, citing a lack of “reliable and consistent data” from the bank (to the surprise of bank leadership).
Both Silvergate and Signature provided crucial fiat settlement services to the crypto industry, allowing clients of each bank to instantly settle fiat with each other and convert between crypto (USDC) and fiat through exchanges (also bank clients) 24/7. Moreover, crypto firms (large and small) are now struggling to find new banking partners. The politically-motivated pressure on banks servicing crypto companies can be seen as amounting to an attempted extrajudicial purge of legal crypto activity in the United States.
SEC’s Regulation by Enforcement
The SEC, led by Chairman Gary Gensler, has become openly hostile toward crypto.
Fundamentally, U.S. securities laws and regulations were written with the underlying assumption that every investment contract has an identifiable issuer/counterparty. In other words, profit and appreciation come from an agreement with another identifiable person/entity. That was indeed the case at the time these laws were written (anything else would likely be considered a commodity or derivative) and still is in traditional finance. However, since blockchain smart contracts enable investment contracts that run autonomously without any issuer/counterparty (no one even hosts the servers hosting the contracts), it seems nonsensical to apply the same rules and requirements here.
Rather than acknowledging and addressing this disconnect, Gensler has stated that all cryptocurrencies, aside from Bitcoin, are likely securities. He’s insisted that existing rules and regulations apply without acknowledging their limitations and has encouraged developers to simply register with the SEC. In practice, 100% of attempts to do so have ended negatively.
To the SEC’s credit, there are few good options. The SEC’s mandate is to protect investors, and there clearly exist malicious actors in the crypto market (as in all markets). However, rulemaking is difficult because new rules must fit within the existing legislative framework, which does not consider the possibility of issuer-independent assets. Instead, the SEC seems to be pursuing a strategy of deterrence based on (a) aggressive, overly broad public statements, (b) selective enforcement actions against the worst offenders, and (c) strategic nonresponse to good actors who are attempting to walk the line. The downside of this strategy is fear and stifling of innovation.
Regulatory Turf War and Ambiguity
Regulators seem to agree that some digital assets are commodities and some are securities. However, the SEC and CFTC seem to have different views at the margin. For example, the SEC has argued that ETH is a security in several enforcement actions, while the CFTC has simultaneously argued that ETH is a commodity in its enforcement actions (e.g., CFTC vs. Binance). Who oversees the regulation of digital assets matters because the two agencies have very different missions. Regardless, the ambiguity hurts the industry. Likely, this will have to be resolved at the legislative level.
Tax law is relatively straightforward in its applicability to crypto. However, there are a few exceptions:
- When used as a medium of exchange, de minimus crypto transactions trigger capital gains/loss tax treatment which is a large administrative burden.
- When crypto is staked in smart contracts that perform some autonomous function, such as trading or lending, it's unclear when gains should be recognized. There is no intermediary to report K1s or 1099s, creating confusion and a large administrative burden.
- Crypto is taxed when it is mined (as income) in addition to when it is sold (cap gains). This is odd because crops aren’t taxed when harvested, nor is gold taxed when mined. In the same way, no one “gives” crypto to miners; it is created by autonomous code for the miner in exchange for processing power or some other provision of resources (similar to growing crops or mining gold).
Software Sanctioned by the U.S. Treasury
In August 2022, OFAC placed Tornado Cash on the SDN list. Tornado Cash is a crypto mixer, intentionally designed to help people obfuscate the transaction histories of their crypto and make it difficult to trace. 23% of crypto sent through Tornado Cash was from illicit addresses, while 77% was from legitimate addresses. Following these sanctions, regulated institutions stopped accepting payments with funds traceable back to Tornado Cash.
This was unprecedented because Tornado Cash isn’t a person, entity, or country. It’s code that was deployed to the blockchain, runs independently of any person, and was used by many for legitimate purposes. That introduces first amendment considerations and right to privacy issues.
The engineer who wrote and initially deployed the code, 29-year-old Alexey Pertsev, was arrested days after the OFAC announcement by Dutch authorities. Initially held without charge, he has since been charged with money laundering. It is unclear if he was involved in promoting or operating the service following its deployment. Regardless, he has become something of a martyr. The Tornado Cash incident is one example of software sanctioning that opens the floor to more questions.
Mining Energy Usage
Bitcoin mining refers to the process of securing the Bitcoin blockchain via dedicated computing resources that solve increasingly complex cryptography. Miners earn bitcoin when they are the first to solve the “math problem” and add a block of transactions to the blockchain. The energy used to run and cool the computers mining Bitcoin (“mining rigs”) is more than the energy usage of Norway.
Critics argue that this energy use is destructive to the climate. The reality, of course, is nuanced. The cost of energy is the main input to mining, so miners are personally incentivized to find the cheapest forms of energy. This can make renewables like wind and solar profitable. It can even make dirty energy cleaner–for example, some miners use methane runoff from oil wells to power mining, which turns methane into carbon dioxide, lessening greenhouse gas effects. Mining can also help stabilize the grid, since they increase demand responsiveness by subsidizing base load electricity during low demand and are incentivized to turn off during spikes in demand and energy prices (which is when the dirtiest power generators turn on to meet demand). For example, in 2022, miners in Texas curtailed their energy usage in heat waves and cold spells, turning off enough power for 1.5 million homes when it was needed the most. Mining is a controversial and highly debatable topic, both sides of the argument must be taken into consideration.
Pro-Crypto 2024 Presidential Candidates
Ron DeSantis (R)
The current Governor of Florida, DeSantis has already worked to make Florida one of the most crypto-friendly states in the U.S. In 2022, DeSantis said he was working with state agencies to figure out how to allow businesses to pay state taxes in crypto. Earlier this month (May 2023), he signed a bill making Florida the first state to prohibit the use of CBDCs. DeSantis had urged Florida lawmakers to draft the bill earlier this year in response to the Biden Administration’s push to establish a centralized digital currency. DeSantis’ stance is that "[A CBDC] provides the government with a direct view of all consumer activities. Any way they can get into society to exercise their agenda, they will do it. So, what the central bank digital currency is all about is surveilling Americans and controlling behavior of Americans."
Robert F. Kennedy, Jr. (D)
Kennedy, an environmental lawyer and nephew of former President John F. Kennedy, has been a proponent of crypto for some time, viewing it as “a major innovation engine”. He has vocally opposed President Biden’s proposed 30% tax on crypto mining, arguing that “it is a mistake for the U.S. government to hobble the industry and drive innovation elsewhere”. Kennedy also believes that financial regulators are waging “an extra-legal war on crypto”, which he views as detrimental to the financial system. Kennedy’s views on CBDCs are similar to DeSantis’, in that he believes they are “the ultimate mechanisms for social surveillance and control”.
Vivek Ramaswamy (R)
A successful American entrepreneur and bestselling author, Ramaswamy is a millennial candidate with libertarian philosophical leanings. As an overriding principle, Ramaswamy believes the ability for citizens to freely opt out of the traditional financial system and into crypto is an important check and balance on the state’s tendency to overreach. Ramaswamy has been outspoken in assigning blame for the FTX fiasco to centralization while distinguishing it from the promise of DeFi. He believes the U.S. should take the lead in digital assets to ensure economic dominance and that the SEC’s anti-crypto posture is a failed strategy that should be a catalyst to rethink securities law from the ground up. Like other pro-crypto candidates, Ramaswamy has vocally opposed CBDCs, citing state surveillance concerns, and has stated that the clear answer to them is “hell no”. However, he is supportive of stablecoins, especially insofar as they further dollarization.
Key Pro-Crypto Elected Officials & Appointed Regulators
Sen. Kirsten Gillibrand (D-NY)
Crypto sentiment is very supportive. Stance is that millions of Americans invest in crypto, but regulations haven't kept up with the rapidly changing industry. Measures should be taken to protect consumers and shut down scams. Gillibrand co-sponsored the bipartisan Lummis-Gillibrand Responsible Financial Innovation Act which, alongside providing consumer protections, would have the CFTC play the primary role in regulating crypto products, rather than the SEC. This would classify most digital assets as commodities rather than securities.
Sen. Cynthia Lummis (R-WY)
Crypto sentiment is very supportive–one of Congress' most vocal crypto advocates. Co-sponsored Lummis-Gillibrand Responsible Financial Innovation. She has introduced several pro-crypto bills since taking office, including an initiative to “treat distributed ledger technology as a developing technology stack on par with artificial intelligence or biotechnology” and called for “the removal or amending of language addressing crypto brokers in the infrastructure bill”. Lummis also co-founded the Financial Innovation Caucus, which focuses on digital currencies. She supports financial privacy, common sense regulation, and enhanced innovation in the financial sector.
Hester Peirce, SEC Commissioner
Known as “Crypto Mom”. Peirce has called for greater regulatory clarity and pushed the SEC to address its lack of clarity on issues such as which cryptoassets qualify as securities. She has criticized the SEC's handling of crypto offerings, arguing that the agency's regulatory approach is overly burdensome and stifles innovation. In 2020, Peirce proposed a safe harbor for good-faith digital assets aiming to become decentralized over time, which would not require them to register as full securities. “We really need to embrace innovation and figure out how we can set up a regulatory environment that’s conducive to innovation, which I think in our space means providing clarity.”
Rep. Tom Emmer (R-MN-6), House Majority Whip
Sentiment is very supportive. Emmer has been a champion of crypto policy for several years. He regularly engages the crypto community, actively works to achieve regulatory clarity to ensure innovation and investment stays in the U.S., and has sponsored multiple bills related to crypto. These bills include: (1) Blockchain Regulatory Certainty Act, which seeks to provide a safe harbor for certain blockchain developers and service providers from being considered money transmitters under federal law, (2) Safe Harbor for Taxpayers with Forked Assets Act, which would create a safe harbor for taxpayers who receive new digital assets as a result of a blockchain hard fork or airdrop, (3) Virtual Currency Tax Fairness Act, which would create a de minimis exemption for capital gains realized from the sale or exchange of virtual currency, and (4) Securities Clarity Act, which aims to provide clarity on the regulatory status of digital tokens and would exempt certain digital tokens from being classified as securities.
Rep. Patrick McHenry (R-NC-10), Chairman of the House Financial Services Committee
McHenry is among the most pro-crypto members of the House. As Chair, he set up the Subcommittee on Digital Assets. He has emphasized the importance of harnessing the potential of these technologies to create jobs and promote economic growth and has been critical of heavy-handed regulation that could stifle innovation in the industry. Most recently, McHenry introduced the Keep Innovation in America Act as a “bipartisan solution to the Infrastructure Investment and Jobs Act's poorly constructed digital asset reporting requirements”.
Key Anti-Crypto Elected Officials & Appointed Regulators
Sen. Elizabeth Warren (D-MA)
A prominent critic of the industry. She’s argued that crypto is a speculative asset that can be used to defraud consumers and is zeroing in on national security concerns as her focus for potential legislation. She’s also raised concerns about the potential for crypto to undermine the stability of the financial system and a host of “issues in the space”, from consumer protections to environmental impact. Warren introduced the Digital Asset Anti-Money Laundering Act of 2022, seen by many in the space as an over-reach. Key quote: “Crypto has become the preferred tool for terrorists, for ransomware gangs, for drug dealers, or rogue states that want to launder money”.
Rep. Brad Sherman (D-CA-32)
From his seat in the Financial Services Committee, Brad Sherman is crypto’s most ardent antagonist in the House of Representatives. Some select quotes: “Cryptocurrencies are a crock”, “Bitcoin, it’s not just for narco-terrorists anymore...it’s for tax evaders too”, and “crypto is not a currency, it is an electronic pet rock.” Sherman has encouraged the SEC to increase its enforcement actions. While the industry and its proponents are calling for regulatory clarity, Sherman believes the industry only exists because of a “regulatory gray area” and wants to see it shut down completely.
Janet Yellen, Treasury Secretary
Yellen has expressed concerns about the use of crypto for illicit activities such as money laundering and terrorist financing. She’s called crypto "extremely risky assets, and even dangerous in some ways," and urged people to "be extremely careful about their activities in this space." She’s also raised concerns about the potential for crypto to destabilize the financial system. During a G20 meeting in February of this year, Yellen called for a strong regulatory framework for crypto activities, noting that the U. S. is not suggesting an “outright banning of crypto activities.“
Gary Gensler, SEC Chairman
Gensler is in favor of more oversight of the crypto industry and believes “everything else other than Bitcoin is a security”. He has been a proponent of greater regulation of the crypto industry, particularly in the areas of investor protection and anti-money laundering. Since taking over as SEC Chairman, Gensler has signaled that he intends to take a stricter stance on cryptocurrencies, particularly with regard to their classification as securities.
Key Advocacy Groups
Note: There are several initiatives currently being built and funded, including 501c4’s and PACs.
- DC-based non-profit research and advocacy center focused on the public policy issues facing crypto–a “crypto think tank”.
- Not a trade association or industry group and doesn’t represent any particular company. Its purpose is to advocate for the freedom to innovate using blockchain technology.
- Produces and publishes policy research, educates policymakers and the media about cryptocurrencies, advocates for sound public policy, and engages in litigation to defend digital civil liberties.
- Executive Director, Jerry Brito has testified several times before Congress and regularly holds briefings for policymakers. He’s presented on cryptocurrencies at the White House, Treasury Department, State Department, SEC, and CFTC.
- Organization’s mission statement: To defend the rights of individuals to build and use free and open cryptocurrency networks: the right to write and publish code – to read and to run it. The right to assemble into peer-to-peer networks. And the right to do all this privately.
- A DC-based trade association/non-profit organization representing more than 100 of the crypto industry’s leading companies, investors, and projects. Self-described as “the collective voice of the crypto industry”.
- Its aim is to educate lawmakers and regulators about crypto networks and push for a more secure, competitive, and pro-innovation digital marketplace.
- Works with its members to create beneficial policy positions with industry consensus and then pushes these policies to policymakers in D.C. and works to block harmful ones.
- Organization’s mission statement: To advance the future of crypto in the U.S., promoting the potential of blockchain technology and shaping policy that ensures its success.
Crypto Council for Innovation
- A trade association that counts a select few of the largest crypto companies and investors as its members, including a16z, Coinbase, Block, and OpenSea. See the full list here.
- CEO, Sheila Warren, is the former lead of the World Economic Forum’s blockchain and digital assets team and was a member of the Executive Leadership Team for the Centre for the Fourth Industrial Revolution.
DeFi Education Fund
- A nonpartisan research and advocacy group focused on educating policymakers about the benefits of decentralized finance and achieving regulatory clarity for the DeFi ecosystem.
- Educates regulators and policymakers, advocates for smart approaches, and distributes grants to individuals and organizations to enhance their focus on and advocacy for DeFi.
- Team can be viewed here.
Satoshi Action Fund
- A nonpartisan non-profit educational organization dedicated to informing policymakers and regulators about the benefits of Bitcoin mining, e.g., how it can be used as a tool to stabilize the grid, grow the economy, and clean up the environment.
- Engages in political campaigns and grassroots efforts to reshape the public policy landscape and advocate for pro-Bitcoin mining policy and regulatory changes.
- Founded by Dennis Porter, a vocal Bitcoin advocate and political strategist dedicated to advancing Bitcoin policy.