What I Learned About Crypto Regulation From a Week in DC

WASHINGTON – Within a 36-hour period, the first bitcoin futures exchange-traded fund (ETF) began trading, the underlying cryptocurrency hit a new all-time high and federal lawmakers dusted off their 2019-era concerns about the Facebook-linked stablecoin project Diem.

I spent most of DC Fintech Week in the U.S. capital to reconnect with people I haven’t seen in two years and put faces to folks I’ve emailed during the pandemic but never actually met. In these conversations, I found that the policy/legislative landscape around crypto has greatly matured since my last visit. Lawmakers who couldn’t care less in 2019 are planning to propose legislation regulating different aspects of the industry in the coming months.

This feature is part of CoinDesk’s “Policy Week,” a forum for discussing how regulators are reckoning with crypto (and vice versa).

There’s also a better understanding of crypto. A lot of the regulatory reaction in late 2019 was focused on the then-Libra project, which was announced by social media giant Facebook that summer. Libra, at the time, was a pretty visionary project that policymakers saw as having the potential to destabilize the financial system. The project, now named Diem, has been fairly quiet over the past 10 months (this week’s news notwithstanding), and we’re seeing lawmakers focusing on broader swaths of the industry.

What happens in 2022 will depend on how the industry handles these issues and how regulators react to the industry.

You’d be forgiven for thinking that all of Washington is focused on crypto issues right now. There’s been no shortage of regulators and policymakers revealing new work around crypto, whether that’s the President’s Working Group for Financial Markets’ pending stablecoin report, the Fed’s pending central bank digital currency report, Securities and Exchange Commission (SEC) Chairman Gary Gensler’s increased comments on registration and regulation of crypto exchanges or the Commodity Futures Trading Commission’s (CFTC’s) recent spate of enforcement actions against industry businesses.

For all that, it’s still pretty early for the industry. A lot of lawmakers have heard of crypto, but it’s not a pressing concern for them. And this is even after the industry helped delay a massive, bipartisan infrastructure bill due to a single provision that impacted it.

The crypto industry is ramping up its engagement with Washington. In a feature for CoinDesk’s Crypto 2022 Policy Week coverage, Rob Garver wrote that companies and trade groups are increasing the number of lobbyists tasked with pushing for crypto-friendly regulations.

This engagement, however, is sort of mixed. At least one congressional staffer described interacting with newer lobbyists as being “painful,” an observation I’ve heard echoed by other industry participants.

We’re also seeing an increase in angry tweets and other social media messages directed at specific lawmakers or regulators. I’m told that these are extremely unhelpful in terms of communicating policy concerns. Great for engagement, though.

Even if it isn’t top of mind, lawmakers and regulators are thinking more about crypto than in years past. We’re seeing this in the fact that aspiring ETF issuers are securing regulatory approvals to list retail-accessible trading products and that we are awaiting no less than three different government reports on aspects of the crypto industry that will inform policy.

One of the biggest issues may just be the differences in how different regulators or lawmakers perceive crypto. Individuals focused on consumer protection may be concerned that exchanges shut down every time the crypto markets grow volatile, while securities/commodities-focused regulators may be more worried with the quietly growing turf war between different agencies over who can regulate what.

And there is a huge amount of attention focused on the use of crypto in criminal activity such as ransomware payments.

The industry, as a collective, has to address all of these issues. Regulations are going to come regardless of whether industry acts or not. How severe these regulatory actions are may depend on how proactive the industry is.

The concern around Libra has morphed into concern over stablecoins at large. The revelation that neither tether (USDT), the largest stablecoin by market cap, nor USDC, the second most-issued U.S. dollar-backed stablecoin, are fully backed by U.S. dollars held in regulated bank accounts, did little to help.

But while regulators seem to agree that something should be done to rein in stablecoin issuers, we don’t yet have a clear picture of how that might be done. The president’s working group will publish a report that may recommend creating a special purpose bank-like charter to oversee stablecoin issuers.

This charter would likely benefit stablecoin issuers and the exchanges that list dollar-pegged tokens by granting some level of legitimacy to the projects.

However, the working group will ask Congress to enact a law creating this charter, and I’m told that is not likely to happen.

The alternative is asking the Financial Stability Oversight Council to create a rule around this issue, which lawmakers and industry participants alike have opposed.

Another train of thought centers around treating stablecoins backed by commercial paper and short-term securities as money market funds, meaning something the SEC would regulate. This would likely not be great for crypto exchanges that list stablecoins like USDT and USDC (Coinbase, for example) as these firms would have to register with the SEC as a securities trading platform and abide by a specific set of rules.

This also seems to be an issue of the industry’s making, but there’s too much in flux to see how these regulations will actually develop.

I joked about how much has happened in 2021 with every person I spoke to. And yet, 2022 is shaping up to be an even more eventful year for crypto policy on several fronts. Watch this space for more heated debate in the coming months.