Today, President Joe Biden will step up to the podium before the members of the United States Congress, the Supreme Court, the executive cabinet, and the nation to address the past and the future of our great nation. Unfortunately, he won’t talk much about the state of crypto policy in his speech, but that doesn’t mean there hasn’t been a lot going on over the past year.
Over the course of 2023, the crypto industry found its voice on Capitol Hill and beyond, continuing to educate policymakers, comment on proposed legislation, and bring bright new ideas to the public. Time has worked to ameliorate issues from the past few years that have given crypto a less than stellar reputation, while some new challenges have emerged that must be dealt with. All of these efforts, combined with work to support pro-crypto candidates in their electoral races this year can, and will lead to an even brighter 2024.
The state of the crypto policy union is strong: and getting stronger.
The Past Year
Crypto Legislation Breaks New Ground
The last year has seen crypto focused legislation achieve new milestones in the US House of Representatives. House Financial Services Chairman, Patrick McHenry, has pushed two major bills forward as he looks to ensure his legacy before his retirement at the end of this year. The committee passed the Clarity for Payment Stablecoins Act of 2023, but visible progress has not been made on the other side of Capitol Hill. Also last year, the HFSC partnered in an extremely rare move with the House Agriculture Committee to jointly pass a larger, more complicated “market structure” bill, the Financial Innovation in Technology for the 21st Century Act, with bipartisan support. Both bills are now eligible for consideration on the House floor, but progress has been stymied by leadership changes in the House, and difficulty passing essential legislation as the clock ticks toward the election in November.
Bitcoin ETF
Though more of a regulatory issue than a policy one; the Securities and Exchange Commission approval of spot Bitcoin exchange traded products will have a real impact on policy making by further legitimizing the asset class, and thus, the technology itself. Bitcoin is nowhere near the most sophisticated or technologically impressive blockchain in the world, but it is the oldest and most widely respected. If the most skeptical regulator in the United States can vote to approve the listing of exchange traded funds based on Bitcoin (yes, they were helped along significantly by results in court) then that signals major progress. The more frequently everyday citizens and policymakers see BTC in their everyday lives, the more comfortable they will be with it, and with crypto.
SBF
Since the downfall of FTX in November 2022, the entire ecosystem has had a Sam Bankman Fried shaped shadow hanging above it. With the completion of his very public trial it is finally looking like that shadow might be lifting from our heads. Bankman-Fried repeatedly appeared publicly on Capitol Hill, bringing powerfully mustered and persuasively articulated ideas with him. Beyond the Hill, SBF doled out campaign funds to members on both sides of the aisle, yielding him real influence and a positive reputation. By personally appearing and giving so much of his time, he put a face to what felt like a faceless industry, and represented what crypto could become to policymakers. The FTX chapter is not completely closed: customers are still waiting on the hopes of being made whole, and his sentencing will be delivered at the end of March. Ahead of that, his lawyers have suggested that, though his charges carry a maximum sentence of 110 years, that he serve a sentence no longer than 6.5 years. Whatever his sentencing, there is hope that the rest of us will be able to move on.
‘Actually, It’s Binance’
With the resolution of the FTX debacle came another high profile crypto company in legal trouble: Binance. In late 2023 a $4.3 billion settlement was announced concluding a years-long probe into the crypto giant. Binance’s founder, Changpeng Zhao (CZ), agreed to step down from his role atop the organization and pleaded guilty to breaking U.S. anti-money laundering laws. While CZ and Binance didn’t play the biggest advocacy role on Capitol Hill when compared to US companies like Coinbase or major trade groups like the Blockchain Association, it’s easy to look at the listings for centralized exchanges and see Binance sitting atop the spot and derivative trading volume listings (dYdX sits atop the decentralized exchange list), and understand how important it is to the entire crypto ecosystem. But while this seems like another black eye in the face of crypto, it’s really a step forward for appropriate regulation. Binance broke the rules, and they are being held accountable for it.
Illicit Finance
Wherever there is innovation, there are going to be bad actors looking to leverage it to take advantage of vulnerable people, and crypto is no exception. The good news is that the inherent transparency and immutability of the blockchain makes it a sub-optimal tool for hiding from law enforcement.
October 7 - Last fall, militants funded by Hamas attacked unsuspecting Israelis resulting in mass casualties, and precipitating an extended conflict that has brought continuing tragedy to the Middle East. A question presented itself: where did they get the money to prosecute their attack? Crypto emerged as an early target. Committees in the House and Senate held hearings to dig deeper into the movement of bad actors and how value flowed across blockchains. Time and time again, the experts brought in to testify reiterated that crypto’s importance in terrorist financing is overstated, and that the vast majority of illicit funds moved through traditional financial infrastructure, with a heavy emphasis on cash, often denominated in US dollars.
AML Proposals in Congress - Multiple pieces of legislation have been introduced over the last year that attempt to prevent bad actors from using crypto as a tool to illegally move illicit funds across borders. One leading proposal comes from Senator Elizabeth Warren (D-MA), the Digital Asset Anti Money Laundering Act. Another bill comes from a group of national security focused senators (Warner, Rounds, Reed, Romney) and is called the Crypto Asset National Security Enhancement and Enforcement Act.
Both of these bills come from a reasonable place: a desire to hold bad actors accountable by closing any gaps that might exist in current law to keep Americans safe. The problem with these proposals is that they are unworkable in practice, and likely to functionally prohibit technology that all available data points to being overwhelmingly used for legitimate purposes. They would likely result in pushing crypto development further offshore, encouraging an unregulated market with illicit finance that can flourish beyond the easy reach of US law enforcement. Enactment of the wrong policy can unintentionally incentivize bad actors abroad while discouraging good innovators at home.
Treasury- In late ‘23 the Treasury released a policy proposal asking Congress for expanded capabilities to police crypto through two broad requests: (1) by the creation of a new sanctions tool; (2) legislation to close so-called gaps in Treasury’s authority to regulate crypto-industry participants under the BSA (Bank Secrecy Act) and IEEPA (International Emergency Economic Powers Act). The request was coupled with a speech from the Deputy Secretary of the Treasury, Wally Adeyamo, at the Blockchain Association’s Policy Summit, warning the audience of coming strict regulation.
The industry will likely hear more from Adeyamo in 2024, as a follow up to his speech and policy proposal. In the speech, and in a similar one he delivered in 2022, the Deputy Secretary requested that the industry police itself and offer creative solutions to the problem of onchain illicit finance. We must heed this call and deliver policy solutions that effectively mitigate illicit activity while protecting the core technology and innovation.
The Year Ahead
The Legislating Window Narrows
Two pieces of House committee passed legislation are eligible for full House of Representatives consideration, but it’s not clear whether they will get their moment on center stage or not.
The Financial Innovation and Technology Act for the 21st Century, and the Clarity for Payment Stablecoins passed through committee mid last year but haven’t seen forward progress since then. It was widely believed that former Speaker Kevin McCarthy, due to his close relationship with House Financial Services Chair, Patrick McHenry, would bring the legislation to the floor when the time was right. Now that he’s been removed from the position and replaced by Mike Johnson of Louisiana whose desire to pass crypto legislation is less understood.
There is increasing reason to believe that stablecoins, a topic long seen as the “low-hanging fruit” of crypto policy, might see some movement by the end of the year. Crypto leaders from both sides of the Capitol, and from both parties, have reportedly been working with important outside stakeholders in the executive branch and beyond to craft a compromise proposal. The question is: will it get completed, drafted, and shared with the rest of the Congress before the serious legislative window closes in anticipation of the November election?
Is A Bull Market Coming?
In a bull market - where asset prices keep rising, or are expected to rise - everyone feels good, everyone is a genius, and crypto sentiment is largely positive, including among policymakers. While nothing is guaranteed, some are predicting that we could be seeing the signs of a burgeoning market now. Bitcoin just hit an all time high, briefly cresting above a price of $68,800. Serious investor money has started to flow into new, cutting edge crypto startups at a level not seen in the last couple of years. Crypto trading volumes are beginning to tick back up as individuals and financial institutions begin to reenter the market with confidence.
But markets are fickle; prices may go up, and may go down. People working on crypto policy must be prepared for whatever comes next with new ideas and the energy to share them with policymakers regardless of market conditions. Ears and eyes might be slightly more credulous if people are making money, though.
2024 Federal Election
While crypto is still not the most important issue in the mind of the average American citizen, it is a fast rising priority for many a concerned voter, and will play a role in this year’s federal elections, especially at the Congressional level. The contest between President Joe Biden and former-President Donald Trump will not be decided by crypto voters, but a few tight House races might. Crypto-focused donors - at the individual and PAC level - have ramped up their giving to targeted candidates, with some success appearing in the recent Super Tuesday primaries. And regardless of any individual elections, as newer (and younger) candidates are elected to the House of Representatives and the US Senate, they will bring their values with them, which includes an increased openness toward new technology, including crypto. While crypto issues have become slightly more partisan over the last two years, it is overwhelmingly a generational issue, a problem only time can solve.
DeFi Legislation
Decentralized finance, or “DeFi” has not been directly addressed in a comprehensive manner by any of the major legislative proposals to date, but that may change in the near future. At dYdX we’re in a unique position - as one of the world’s largest decentralized exchanges by volume, and one of the oldest DeFi projects still building in the space - to comment on legislation and come up with new ideas. One problem thus far is the DeFi community hasn’t figured out a set of ideas that we can be for, rather than against. That’s why the founder and CEO of dYdX, Antonio Juliano, recently released a set of DeFi policy principles, to get a conversation started about what DeFi regulation should look like. Read more about our Principles HERE.
While the State of the Crypto Policy Union is already strong: it’s only getting stronger.
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