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In early 2022, the cryptocurrency industry appeared to have gained a foothold in mainstream culture: crypto companies were spending millions of dollars on Super Bowl ads, celebrities lined up to promote their investments and Sam Bankman-Fried — co-founder of one of the largest crypto exchanges, FTX, and crypto trading company Alameda — was telling everyone he was going to save the world. But by December, Bankman-Fried would be charged with defrauding investors and released after posting a $250 million bail, and the global crypto market lost $200 billion after the dramatic collapse of high-profile tokens and exchanges. 

The future of the industry looked grim, but with crypto, the headlines are almost as volatile as the markets themselves. As government entities weigh how to keep it in check, crypto leaders have followed the example of more established industries in spending big to shape regulation in their favor.

The Basics

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Crypto has been around for over a decade, and the question of how it fits into the wider financial system remains up for debate. Whether it’s characterized as commodity, security or just an elaborate greater-fool scheme that converts mathematics into greenhouse gas, the technical underpinnings of blockchain-based financial products often obfuscate practical discussion of the industry.

Over 20,000 different cryptocurrencies are available worldwide on almost 550 exchanges, but the market is currently dominated by two “coins,” Bitcoin and Ether, both of which have market caps that reach into the hundred billions. 

There are a few shared characteristics across all crypto: semi-anonymous users operate on decentralized networks where trust in a typical verifying authority like a bank or credit card company has been replaced with a series of redundant, process-intensive calculations, the product of which are tokens. One can make a profit either through buying and selling such tokens on an exchange, or mining them through the aforementioned series of redundant, process-intensive calculations. 

A word on those calculations, because this aspect is at the crux of understanding crypto. Without a central authority involved to verify that money is not spent twice, all computers in a given network must agree before a transaction can be added to the uneditable ledger, also known as “the blockchain.” To do this, blockchain platforms use what is called a consensus mechanism. Bitcoin uses a mechanism called proof-of-work, in which miners compete with one another to solve a cryptographic problem. The Ethereum blockchain — which supports the Ether coin, among others — switched to an alternative method called proof-of-stake in 2022.

The current status quo has few to no protections for users against scams and fraud. Crypto mining also has a carbon footprint larger than many countries, and its energy consumption is only expected to grow as the computer hardware arms race among miners competing for coins continues to heat up.

Questions of Regulation

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Cryptocurrency has been banned in nine countries, most notably by China in 2021. In the period since, mining operations have boomed in areas of the world where power is cheap, plentiful and dirty

In the United States, cryptomining has grown everywhere from fields of shipping containers in rural Nebraska to the crawl space of a high school in Massachusetts. In Texas, where the energy market is almost as loosely regulated as crypto, new opportunities for profiteering have abounded. Crypto proponents and detractors have long been at odds over the question of whether digital assets should be treated as commodities or securities. Classification remains a salient question given the additional regulations and disclosure requirements that govern securities trading in the U.S.

Since the collapse of FTX and subsequent massive losses that plagued crypto markets in late 2022, some prominent critics have addressed the possibility of banning cryptocurrencies in the U.S., although there are few indications that the federal government will elect to issue an outright ban.

Numerous bills seeking to provide clarity on the industry have been introduced in both the U.S. House and Senate since 2018. At the state level, crypto exchanges are sometimes regulated through money transmission laws. In New York, for example, crypto exchanges are required to hold a “BitLicense” to transmit virtual currency. 

Otherwise, the task of regulating crypto has thus far been left to a patchwork of rules and guidance from the Securities and Exchange Commission, Commodity Futures Trading Commission and the Treasury. One bipartisan caucus in Congress has objected to even that minimal oversight.

This could all change. In March 2022, the White House issued an executive order calling for an inter-departmental effort to clarify the regulatory environment surrounding digital currencies. President Joe Biden’s 2024 fiscal year budget also includes a proposal for the Digital Asset Mining Energy (DAME) Tax, which would tax firms at a rate equal to 30% of the cost of electricity used for crypto mining. Meanwhile, GOP members of the House Financial Services Committee are considering proposals in support of the industry, such as providing “a safe harbor from licensing and registration for certain non-controlling blockchain developers and providers of blockchain services.”

Amid the storm of crypto-related legislation brought forth in recent years, two bills in particular were the subject of significant lobbying efforts in the 117th Congress. Introduced by Sens. Kirsten Gillibrand (D-N.Y.) and Cynthia Lummis (R-Wyo.), the Lummis-Gillibrand Responsible Financial Innovation Act set forth a comprehensive regulatory framework for digital assets and will likely be reintroduced in 2023. Sen. Debbie Stabenow (D-Mich.) sponsored the Digital Commodities Consumer Protection Act, which would empower the Commodity Futures Trading Commission to oversee regulation of digital commodities.

Efforts to regulate crypto were renewed under Republican leadership in June 2023, when House Financial Services Committee Chair Rep. Patrick McHenry (R-N.C.) and House Committee on Agriculture Chair Rep. Glenn Thompson (R-Pa.), announced draft legislation proposing a regulatory framework for digital assets. 

On top of that, Sen. Ed Markey (D-Mass.) and Rep. Jared Huffman (D-Calif.) have re-introduced the Crypto-Asset Environmental Transparency Act in the 118th Congress. The bill would compel cryptomining companies to disclose their greenhouse gas emissions and require the Environmental Protection Agency to conduct a comprehensive investigation into the environmental impacts of cryptomining in the U.S. 

CBDCs and Consumer Protections

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In January 2022, the U.S. Federal Reserve Board released a white paper weighing the possibility of implementing a Central Bank Digital Currency, a form of digital currency issued by a central bank and widely available for use by the general public. That currency would be distinct from crypto in that it would be centrally controlled and government-backed, whereas crypto assets operate on decentralized open networks. Biden’s 2022 executive order proposes that a Central Bank Digital Currency issued by the Federal Reserve should be explored as a lower-risk alternative to privately administered digital currencies.

In response to the proliferation of scams and theft targeting crypto assets in 2022, the Consumer Financial Protection Bureau published a report detailing the risks of cryptocurrencies to consumers at large. Aside from the volatility of the assets, consumers are also frequently victimized by hacks, and the transparency issues inherent to crypto transactions have made users vulnerable to “pig butchering” scams and other kinds of fraud. Making matters worse, most victims of crypto fraud are subject to mandatory arbitration clauses that offer them little recourse to resolve disputes in court.

Crypto Industry Spending

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Unsurprisingly, 2022 was a banner year for crypto industry lobbying. Total federal lobbying spending was more than double that in 2021. The number of crypto industry lobbyists exploded to 279, the majority of whom were revolving door hires who previously held jobs in the federal government. 

Among the top spenders in crypto lobbying were Coinbase and Binance, two major crypto exchanges sued by the SEC in June 2023. Binance allegedly mishandled customer funds, while Coinbase was charged with violating the law by selling unregistered securities.

Alongside the massive increases in lobbying spending, political contributions from crypto firms reached unprecedented heights during the 2022 election cycle. FTX was far and away the highest spender. The tens of millions of dollars that founder Sam-Bankman Fried funneled to federal candidates and committees put him among the biggest overall donors for the 2022 election cycle, and his alleged straw donor scheme appears to have made former Director of Engineering Nishad Singh and former Digital Markets co-CEO Ryan Salame into Democratic and Republican megadonors, respectively. 

Historically, donations from the crypto industry have not broken down along partisan lines, although many of the top career recipients are Democrats. That group includes Sen. Ron Wyden (D-Ore.), who chairs the Senate Finance Committee, and Rep. Jake Auchincloss (D-Mass.) who served as vice chair of the House Financial Services Committee in the 117th Congress.

The crypto industry’s top 10 beneficiaries in Congress also include McHenry, current chair of the House Financial Services Committee, and Gillibrand, both of whom have sponsored legislation to establish regulatory frameworks for digital currencies. Gillibrand’s home state of New York is also home to a prolific number of crypto startups.

Rep. Ro Khanna (D-Calif.) stands out as the highest career recipient of funds from crypto firms. Khanna, whose home district makes up part of Silicon Valley, also happens to be one of the most conspicuous tech optimists in Congress. Despite the disproportionate wealth of his constituency — whose median income is more than double the national average — Khanna has repeatedly backed crypto for its democratizing potential

Ranking sixth in career contributions, Rep. Tom Emmer (R-Minn.), who serves as the majority whip for the 118th Congress, is perhaps the most powerful crypto evangelist in Congress. In 2020, Emmer worked with industry leaders to offer the first crypto town hall, where he praised the decentralized structure of blockchain technologies and announced that he would accept donations in crypto for his reelection campaign. He has also been outspoken against the notion that decentralized digital currencies pose undue risks to consumers.

After announcing his intention to run for President as a Democrat in April 2023, Robert F. Kennedy, Jr. delivered the keynote address at the Bitcoin 2023 conference, where he promoted deregulation of the crypto industry as an avenue for increasing transparency in government. Although he denied being an “investor” in Bitcoin, Kennedy later disclosed crypto holdings valued over $100,000.

The Blockchain Caucus

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In March 2022, the SEC received a letter from a group of eight members of the House — four Democrats and four Republicans, including Auchincloss and Emmer — questioning the agency’s authority in investigating cryptocurrency and blockchain firms. It was later reported that one of the firms receiving inquiries from the SEC during this time was FTX, the cryptocurrency exchange founded by Bankman-Fried, which collapsed and declared bankruptcy in November 2022.

The letter’s cosigners are all members of the Congressional Blockchain Caucus, which was formed in the 114th Congress and has grown to include 35 members. Chaired by Emmer, Rep. Darren Soto (D-Fla.), Rep. Bill Foster (D-Ill.), and Rep. David Schweikert (R-Ariz.), the caucus promotes a “light touch regulatory approach” for blockchain technology. On average, members of the Blockchain Caucus have received more than three times as much in career contributions from crypto firms compared to their colleagues outside of the caucus.

Crypto & Campaign Finance 

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The main benefits frequently touted by cryptocurrency proponents include an independent, decentralized framework and greater privacy for transactions, both of which would seem to be in conflict with the centralized transparency measures that the Federal Election Commission is mandated to promote. While the legality and regulation of the industry is far from settled, the FEC has tacitly allowed campaign contributions via cryptocurrency since issuing an advisory opinion on Bitcoin in 2014.

Unlike cash and in-kind donations, cryptocurrencies have no objective measure of value, and their inherent volatility poses a challenge to the enforcement of contribution limits. By way of addressing that volatility, FEC guidance dictates that committees should value crypto contributions based on their market value at the time they are received. Since the advisory opinion also states that crypto cannot be used to buy goods or services, it is common practice for committees to liquidate their crypto holdings upon receiving the donation.

Reporting crypto contributions presents another set of obstacles. Although Bitcoin and Ethereum maintain public ledgers, blockchain transactions are linked to wallet addresses rather than actual identities, opening the door for illegal campaign contributions to be disguised as legitimate. Notably, much of the money that Bankman-Fried contributed to the Protect Our Future PAC in the form of crypto assets was funneled through a third-party fintech firm, an episode that shows one of the many ways for new financial mechanisms to be leveraged to skirt disclosure practices. 

At the state level, the regulatory environment remains inconsistent. While Michigan, North Carolina and Oregon have issued outright bans on crypto contributions, most states operate as gray areas that don’t explicitly allow or prohibit them. In 2022, California reversed the ban on crypto contributions to state and municipal candidates that was enacted in the state in 2018, though donations must be processed through payment services registered with the U.S. Department of Treasury.

Olivia Buckley and Ciara O’Neill (July 2023)

Sources


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