Crypto reform will come to the US in 2023, says former White House chief of staff

In the United States, crypto reform legislation is not the province of a single political party, which is why a former US congressman, who also played a prominent role in the Trump administration, believes that the passage of a federal law on “digital assets” this year is a real possibility.

“The Democrats are not all on one side; The Republicans are not all on the other side, said Mick Mulvaney – budget director and later acting White House chief of staff from January 2019 to March 2020 – and further explained:

“I think in this Congress, which functionally has about 14-16 months left before it kind of shuts down before the next election cycle, you’re going to get a meaningful piece of legislation on blockchain/crypto — what we refer to collectively as digital assets.”

Mulvaney’s government resume is long and varied. In addition to six years in the US House of Representatives, he was also director of the Office of Management and Budget from February 2017 to March 2020, as well as the US special envoy to Northern Ireland – a position he resigned from on 7 January. , 2021 – the day after protesters inspired by President Donald Trump attacked the US Capitol Building. Mulvaney is now a strategic advisor for Astra Protocol, a Switzerland-based Web3 Know Your Customer (KYC) platform.

Centralized versus decentralized economy

Mulvaney has an interest in Bitcoin (BTC) and blockchain technology that goes back nearly 10 years. In 2016, he co-founded the Congressional Blockchain Caucus. Today, he says that decentralized financial protocols (DeFi) have some important advantages over their centralized counterparts. Moreover, it is now possible to integrate important compliance processes such as KYC and Anti-Money Laundering into DeFi platforms – which will reassure regulators.

“There is a weakness in the system when it comes to centralized and a strength that comes from decentralized finance,” he said. Much of the fraud commonly associated with the crypto space can be attributed to centralized entities, from Mt. Gox to FTX. DeFi, in his view, brings additional layers of transparency that make it more difficult to engage in fraudulent activities, “and over the last decade has proven to be the better system […] Even regulators are starting to understand this,” he told Cointelegraph.

“Regulators dropped the ball”

When you talk to one of the Trump administration’s top economic chiefs, it would be hard not to to ask about the current banking crisis. Silicon Valley Bank (SVB) was arguably ground zero in this upheaval, with some critics — notably Sen. Elizabeth Warren — criticizing the Trump administration for loosening banking regulations that might have averted SVB’s bankruptcy.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, passed in response to the 2007–2008 financial crisis, introduced the idea of ​​”stress testing” large US banks deemed too big to fail. However, the test threshold was revised in 2018, which meant that SVB and Signature Bank (also troubled) were no longer considered “systemically important financial institutions” that were subjected to stress testing. As Warren wrote in The New York Times:

“Had Congress and the Federal Reserve not rolled back the stricter oversight, SVB and Signature would have been subject to stronger liquidity and capital requirements to withstand economic shocks.”

Is Warren right that the previous presidential administration was at least partly to blame? “It would have happened anyway,” Mulvaney replied. “The changes in 2018 were relatively narrow in scope. Essentially, it took banks under $250 billion [in balance sheet assets] based on the very highest level of regulation.”

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Silicon Valley Bank was still subject to banking regulation, just not the very highest. Meanwhile, duration risk, characterized by taking short-term deposits and investing them in long-term assets — arguably the key factor in SVB’s downfall — is “one of the simplest, most fundamental things that the SEC [Securities and Exchange Commission]FDIC [Federal Deposit Insurance Corporation] and the Fed is supposed to be watching, Mulvaney said. “The very lowest levels of regulation should have caught this.”

“The regulators dropped the ball,” he stated, stressing that this was a management failure “in a bank that happened to be dealing with crypto customers. This was not a crypto-induced problem, and I think it’s important to note.”

Crypto has bipartisan support

Why is Mulvaney so optimistic about the prospects for federal crypto or blockchain legislation this year? For all the talk of political polarization in Washington DC, especially in Congress, some issues remain “quite bipartisan,” he explained. One is antipathy towards China. Another is suspicion of Big Tech. But a third is “an interest in crypto and blockchain.”

Take the House Financial Services Committee, on which Mulvaney once sat. Its Digital Assets Subcommittee is chaired by Republican French Hill, a crypto and blockchain supporter, but the subcommittee also includes crypto supporters on the minority side (Democrat), including Ritchie Torres, who spoke to Cointelegraph earlier this year on the prospects for reform of digital assets legislation.

Bipartisanship also extends to the US Senate, where Republican Cynthia Lummis and Democrat Kirsten Gillibrand jointly introduced the Responsible Financial Innovation Act of 2022, which aims to create a regulatory framework for digital assets. Mulvaney explained:

“You have a group of people in both parties who just want to know more; they are interested in the subject, they want to educate themselves.[…] That’s where we are right now with crypto and blockchain.”

Next generation compliance

The Astra Protocol, where Mulvaney now serves as a strategic advisor, bills itself as next-generation compliance – a decentralized KYC platform for Web3 that “brings the financial regulatory standards of 155+ countries and over 300 sanctions and watchlists to the crypto industry without sacrificing anonymization.” KYC is a process that many banks and businesses use to verify the identity, suitability and risk of potential customers.

But how can one ensure anonymity when trying to verify identities and conduct background checks?

“I think everyone has realized that there are different levels of it [anonymity]”, Mulvaney said. “For example, I can tell you who I am. And once you know who I am, you can prove to me who you are so that we can deal with each other with a certain level of trust without telling the rest of the world who we are.”

The Astra protocol says its “patented technology” requires experts from major global firms to verify a user’s credentials and perform KYC checks on potential DeFi users. This allows DeFi protocols to comply with privacy regulations without access to investors’ personally identifiable information. The idea is something like zero-knowledge proof.

“The Astra protocol has no idea what happened between a DeFi protocol and a regulatory delegate,” the project says. A DeFi project or exchange will be able to know that you are who you say you are and, more importantly, that “you are not on a sanctions list. You are not a drug dealer. You are not a child pornographer, you are not a bot,” Mulvaney added.

Embrace new technology

So far, the Biden administration has not identified itself as a good friend of cryptocurrencies and blockchain technology. Were things different in the previous administration? What, if anything, was said about crypto in the White House?

“It was pretty much what you would see in the general public at the time,” Mulvaney replied: “‘We’re not quite sure what it is. It’s a new piece of technology […] What are the possibilities,’” and so on.

He recalled conversations on the subject with then-Comptroller of the Currency Joseph Otting, “trying to figure it out.” For example, which agency should take the lead in regulating digital assets: the Commodity Futures Trading Commission (CFTC), the SEC, or a banking agency? “It was a tie,” Mulvaney recalled. “It was unknown because it was so new.” But it suited the time. “You don’t want iron-clad positions,” especially when adapting to new technology.

Everyone but Gensler

“I hope that is what is current [Biden] the administration does”, i.e. engage in an open-minded discussion. – I get the impression that [SEC chairman Gary] Gensler sort of dominates the debate. He is clearly one [crypto] skeptic. I don’t think it’s particularly healthy. I don’t want my regulator to take sides.”

Which government department or commission should score on crypto? Mulvaney is leaning against the CFTC, which wants to regulate crypto more like a commodity, not a value. Many in the crypto community are also likely to favor CFTC preemption. He added:

“I just don’t think Gary Gensler has the mindset to do that [act objectively]. So right now, put me down as supporting anybody other than the SEC because Gensler is still there.”

Remaining Obstacles

What does the former acting White House chief of staff think about crypto and blockchain’s long-term prospects? Does the technology have an Achilles heel that will prevent global adoption?

It will not fail because it is (allegedly) misused by criminals and terrorists, he stated. Lawmakers are slowly learning something that law enforcement agencies have known for some time. “Crypto is actually much better for law enforcement than cash — because even though it’s anonymous, it’s still traceable,” Mulvaney said.

The biggest opposition is likely to come from “countries concerned about their own currency being replaced.” He does not include the US in this group, but EU countries could be candidates. “The Europeans may worry that the euro may eventually be replaced by a digital currency because the euro is sort of held together by a needle and thread.”

What about the International Monetary Fund (IMF), which has warned its 190 member countries against making Bitcoin and other private money “official currency?” Is it a responsible position for the world’s lender of last resort?

“No, I think they’re way off track,” Mulvaney replied. The IMF was set up to do one specific thing, “which is to lend money to countries to help them develop.” Whatever a country wants to adopt as its official currency “is really none of the IMF’s business.”

He believes in the “competition of ideas” and “if you get a certain country that wants to adopt Bitcoin or a certain cryptocurrency, I think that’s fine. It’s useful and can stimulate more innovation.”

Bitcoin and gold

Mulvaney’s interest in Bitcoin dates back nearly a decade and arose “by accident.” He attended a conference on the gold standard, and “there was a young lady there, who talked about something I had never heard of before, which was Bitcoin, and explained how it was fixed in total numbers,” and so on.

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“I remember turning to her at the end of the conference and saying, you know, it’s not exactly the same as the gold standard, but it has some interesting parallels. I’d like to know more about it.” They spent some time discussing the new technology, its history, how it worked, and where and how it was put to use. “I was just fascinated.”

What specifically drew him to Bitcoin? “The value is set by technology.” Later, as head of the Office of Management and Budget, he saw firsthand “what we have done with the currency. I am very aware of how much of it [U.S. dollars] we have been printing over the past ten years.”

“It scares me to death. So to have something that the government can’t, at least in theory, change the value of unilaterally by fiat — that appealed to me, and I think it appeals to a lot of people.”