Congress to Shape Crypto Regulation After FTX Collapse: Here’s What Could Happen

If familiarity breeds contempt, the crypto industry should put on a helmet in these opening days of the 118th US Congress because lawmakers know the digital asset sector much better than they once did.

The luster is gone from bitcoin, and the pre-partisan days of educational hand-holding by industry boosters have been drowned out by current events. In a potentially momentous session where US lawmakers could shape how virtual assets are used around the world, crypto’s drama will overshadow everything, starting with hearings focused on the FTX bug.

Before FTX’s Sam Bankman-Fried was indicted for an epic fraud that two of his former lieutenants said he orchestrated, he was Washington’s favorite proxy for the crypto world. As one of the industry’s chief ambassadors on Capitol Hill, the affable CEO spent an awful lot of time with lawmakers, so his exposure as an alleged villain is much more damaging to the industry.

Not only that, he and other top FTX officials were a shocking source of campaign finance in the last election cycle, giving directly to no less than one in three members of Congress, a recent CoinDesk analysis showed (and indirectly to many more). Now it is up to the 196 senators and representatives to explain what they have done with these contributions from Bankman-Fried and others.

In the room where it happens (to borrow the earworm from “Hamilton”), there is a stench of crypto’s misdeeds. And the industry won’t have to wait long to get the first sense of where it stands now in Washington.

“It’s going to come a lot faster than people think,” said Ron Hammond, director of government relations at the Blockchain Association, who expects the relevant committees to return to investigate the FTX debacle in the next few weeks. “They’re ready to hit the ground running.” Crypto is among the topics receiving the most immediate attention in the House Financial Services Committee and the Senate Banking Committee. The industry is finally getting the priority status it so desperately wanted, but for the wrong reasons.

Headline-conscious lawmakers — many of them recipients of those FTX dollars — will get some early messages off their chests before the legislation begins in earnest. And the divide between the political parties will grow stronger, dampening the conspicuous glee the industry once felt at how partisan the work was.

The new Republican line: Blame crypto’s missteps on humans. Don’t blame the innovative technology!

From Democrats: Crypto is an untamed beast that steals people’s savings and doesn’t seem useful for anything.

U.S. lawmakers have so far produced no significant laws to establish crypto oversight, despite a series of legislative efforts last year that fell through. To change that in this newly divided Congress, Republicans must recognize that their majority in the House is razor thin and that they need a cross-party partnership to move anything over the next two years.

“Nothing is going to happen unless it’s bipartisan,” said Parker Hamilton Poling, a former executive director of the National Republican Congressional Committee who was once chief of staff to Rep. Patrick McHenry (RN.C.), the new House speaker. Financial Services Committee.

McHenry is “very eager to engage” with Democrats on crypto issues, and Poling — now a partner at Harbinger Strategies — said the congressman needs to find some common ground with Senate Banking Committee Chairman Sherrod Brown (D-Ohio) because any legislation “is going to to require some effort on both sides.”

Brown made some noise late last year with comments that put him in the crypto-suspect category, although he also wrote a letter to US Treasury Secretary Janet Yellen saying he was serious about sitting down to figure out a whole-of-government approach to regulate the sector. .

Sheila Warren, executive director of the Crypto Council for Innovation, believes this will be the “Crypto Congress” because the industry’s need for oversight “hits the trifecta of interest, understanding and urgency with lawmakers,” she said. “Crypto will become an inevitable issue for members of Congress, and when it comes to crypto politics, there is something for everyone.”

So far, the strongest legislative progress has been in monitoring stablecoins such as Tether’s USDT and Circle Internet Financial’s USDC, which are pegged to the US dollar as a means of keeping their values ​​stable. Regulators universally agree that stablecoins, the lifeblood of crypto trading and decentralized contracts, need impeccable reserves and disclosures to avoid threatening the broader financial system.

Lawmakers from both parties also agree, and they ironed out the final details of a House bill as the clock expired last year.

“Stablecoin efforts are still alive,” Poling said. “They were very close and they can pick it up again.”

Because that work was “almost to the finish line,” Himes, a member of the House committee that worked on the stablecoin bill last year, predicts that Congress can get it done.

“Where we’ve really gained some momentum is on the issue of stablecoins, and that might be the place to start, with tens of billions of dollars worth of stablecoins being traded every day,” he said.

Hammond warned that the industry should not expect that to happen at a lightning fast pace. He said he will look for any legislation in the latter part of 2023.

Crypto lobbyists are pinning a lot of hope on McHenry’s brand new crypto subcommittee and its chair, Rep. French Hill (R-Ark.), who is seen as a good negotiator with deep financial knowledge.

The Senate and House agriculture committees have also been active in trying to come up with bills, often focused on giving the Commodity Futures Trading Commission (CFTC) new powers to regulate crypto — including the spot market for crypto commodities like bitcoin.

A fundamental question still looms over the industry: What makes a crypto token a value or a commodity? Congress’s response will likely require a bill that crosses the Finance and Agriculture committees of both chambers, and will require many different lawmakers to come together.

Some previous bills have attempted to address the problem, such as a far-reaching, bipartisan proposal last year from Sens. Cynthia Lummis (R-Wyo.) and Kirsten Gillibrand (DN.Y.) while it was a conversation starter — as designed. — the ideas remain theoretical, and none of the lawmakers have the power to push it through one of the many committees that must approve it.

On that score, the Digital Commodities Consumer Protection Act from the leaders of the Senate Agriculture Committee enjoys more favor, but it has not achieved its promise. One of the bill’s most prominent champions was Bankman-Fried, who now sits in her parents’ Palo Alto home wearing an ankle monitor. His aggressive lobbying on its behalf may have tarnished the effort. Proponents of decentralized finance (DeFi) were concerned that an early version of the bill would trample on their business model, although that language appeared fluid late last year. The bill’s authors have said they still intend to get the effort to the Senate.

Old legislation must be reinstated in this new session, and the recent consensus among lawmakers and regulators is that FTX warrants a reassessment of how Congress approaches the industry. Wherever the negotiations go, they must clear the bottleneck of Brown’s Senate Banking Committee, which Hammond said “will be the waiting period for the most part.”

And the burning crypto issue — security or commodity — remains “like a steamlock,” Himes said, with Securities and Exchange Commission (SEC) Chairman Gary Gensler quashing the debate with his assertion that his agency already has all the authority it needs. to bring the industry into line and he just needs to keep punishing the companies to follow them. Lawmakers must decide if he is right or if new powers need to be authorized, Himes said.

Despite crypto’s reputational mess, the industry’s current self-inflicted crisis may have a silver lining: Great financial legislation tends to rise from smoldering ruins. Like the Enron failure (which drove new accounting laws) and the 2008 housing bust (which spurred the Dodd-Frank Act of 2010), Bankman-Fried’s unintended legacy may be legislative.

“Nothing spurs legislation like a crisis,” Hammond said. “FTX could be the straw that breaks the camel’s back.”