President Biden cracks down on crypto. What lies ahead for companies and investors.

The reports followed a scathing letter from the White House earlier this month about the climate impact of cryptomining, which uses vast amounts of electricity to process transactions, primarily for

Bitcoin.

For crypto companies and investors, it looks like another pivotal moment. And like everything else in crypto, the regulatory push is fueling more controversy and uncertainty about whether Washington will figure out how to establish rules without breaking the industry’s back.

“It’s clear there’s a lot of work the Biden administration wants to do,” said Owen Tedford, an analyst for Beacon Policy Advisors, a Washington, D.C.-based research firm.

Despite its anti-government roots, the industry seeks regulation, albeit on its own terms. The idea is that a legal framework for tokens and trading platforms will attract more regular users along with institutional pools of capital, such as pension funds.

The industry also needs to restore credibility, given the recent explosions. The bankruptcies of major crypto firms such as Celsius Network, Voyager Digital and Three Arrows Capital helped wipe out $2 trillion in the token market, undermine crypto’s appeal to institutional investors and put pressure on lawmakers to come up with consumer protections.

“The industry is very supportive of having consumer protections and investor protections in place,” said Brett Quick, head of government affairs for the Crypto Council for Innovation, a trade group that includes members

Coinbase Global

(ticker: COIN) and venture capital firm Andreessen Horowitz.

Political momentum to regulate crypto is clearly building. Along with the push from the White House, bipartisan bills in Congress could settle long-standing issues, such as which tokens qualify as securities and which agencies should be in charge of oversight.

At stake are rules for exchanges such as Coinbase, investment companies such as Grayscale Investments and miners such as e.g.

Riot Blockchain

(RIOT) and

Marathon Digital Holdings

(MARA). Token issuers and companies that support decentralized financial networks are on edge because they could come under more scrutiny from agencies empowered to carry out the president’s orders.

At the same time, crypto’s critics see the regulatory momentum as a Pyrrhic victory. Some consumer advocates see the White House’s initiatives as a backdoor for crypto to deepen its ties to the financial system. And they worry that more regulation will only widen the appeal to retail investors, paving the way for more investors to lose money in tokens and crypto-related companies.

“Now you can have a crash where trillions of dollars disappear in a matter of months, but the systemic implications are zero,” says Dennis Kelleher, CEO of Better Markets, a Wall Street watchdog turned major crypto critic. “That will not happen if the industry is connected to the core of the banking and financial system.”

White House climate report on crypto illustrates the administration’s obstacles. Mining, which runs computers 24/7, consumes up to 1.7% of US electricity, while crypto activity overall pumps up to 0.8% of US-based greenhouse gas emissions into the atmosphere, the report said. None of this is compatible with the administration’s goal of cutting emissions by up to 52% by 2030.

So what to do about it? The White House laid out several actions that the EPA and Department of Energy could take. The most draconian would ban proof-of-work mining – the process the Bitcoin network uses. Other major blockchains, such as Ethereum, have moved to less energy-intensive systems, making Bitcoin an outlier.

But a mining ban is also the least realistic solution; mining would simply move to other countries. And a potential ban already has the industry promising legal challenges. “The White House is on dubious legal ground should they ever attempt to ban Bitcoin mining,” tweeted Lee Bratcher, president of the Texas Blockchain Council, a trade group that represents cryptomining interests in the state.

That is only a small facet of the administration’s challenges. Friday’s reports detailed crypto’s threats to consumers, financial stability and the tools the government is using to combat illicit finance. One report even said the Labor Department should investigate the fiduciary conduct of 401(k) plan sponsors that offer crypto as an investment — a swipe at Fidelity Investments, which aims to offer Bitcoin in pension plans it manages. Fidelity said it sees its crypto product “as a responsible solution to meet the demands of mainstream interest.”

For many crypto companies, regulation is now seen as a necessity. Crypto emerged among libertarians averse to government intervention; many proclaimed blockchain technology resistant to “censorship” and other forms of control. Still, the bulk of funding now comes from venture capital and banks that believe regulation will strengthen cryptocurrencies. Oversight is inevitable, given the size of the token market, at $1 trillion, and financial interests in crypto from Wall Street to Silicon Valley.

The industry has built a powerful lobbying force and is flooding pro-crypto candidates with contributions. The Blockchain Association, a trade group, unveiled a new political action committee this past week. Coinbase CEO Brian Armstrong also said last week that the company had integrated “cryptopolitical efforts right into our app,” including ratings for politicians on a crypto-friendliness scale. Although his political concerns go beyond crypto, FTX founder Sam Bankman-Fried recently said he could spend $1 billion on the 2024 election.

The industry sees Congress as the key to winning favorable regulations. That’s in part because it would likely require a law to settle perhaps the most contentious question: which tokens should fall under the supervision of the SEC.

SEC Chairman Gary Gensler, who has filed several enforcement lawsuits against crypto companies, said in a Senate hearing Thursday that he believes the “vast majority” of tokens are securities under the agency’s jurisdiction and that exchanges should be registered.

But putting the SEC in charge of crypto is far from a done deal. The Senate Agriculture Committee is considering a bill that would put the bulk of crypto under the oversight of the CFTC, which the industry sees as a lighter regulator. Crypto supporters asked the committee this week to add provisions to the law that would define most cryptos as commodities, which would take away much of the SEC’s enforcement and regulatory powers.

With the midterm elections in November looming, the bill has little time to become law this year. But the industry believes it can move forward in 2023, regardless of which party controls Congress. “The agencies have done everything they can, and we really need Congress to step in,” said Blockchain Association Executive Director Kristin Smith.

As regulatory momentum builds, investors in crypto stocks have more immediate concerns. Bitcoin is trading just below $20,000, down 72% from its November high. Mining companies may be less concerned about a ban on their operations than staying afloat amid a long crypto winter that has wiped out profits and put some miners on the brink of insolvency.

The exchanges are also ailing. Coinbase stock is down 70% this year. “The biggest fear for Coinbase is not regulation, but natural causes of death: fee compression, over-hiring and less committed investors who were burned and discouraged from playing again,” says Mizuho Securities analyst Dan Dolev.

For now, the industry may just be hoping to ride out this downturn while convincing Congress to protect it from a regulatory wave that the White House is trying to build.

Write to Joe Light at [email protected]