To the untrained ear, Hester Peirce’s comment sounded anodyne, but everyone in the audience knew what she was doing: selling out her boss. “It’s fairly clear,” the U.S. Securities and Exchange commissioner said from the Washington conference stage, “that we’ve been taking an enforcement-first approach in an area where we should be taking a regulatory-first approach. I think we’ve got the balance wrong right now.”
Peirce was speaking at the D.C. Blockchain Summit in May, to an audience of the cryptocurrency faithful. Outside the auditorium, geeks, lobbyists and investors mingled in a cavernous converted warehouse. “Trust is non-fungible,” read a banner for the accounting firm Deloitte, hung from a balcony where the company was sponsoring a lavish spread of snacks. Most attendees were done up in D.C. drag—conservative suits and dresses, more boardroom than Burning Man.
The message was clear: crypto has arrived in Washington. With more than 800 attendees, the summit was the largest ever hosted by the Chamber of Digital Commerce, a trade association representing blockchain companies. In prior years, the conference was co-sponsored with Georgetown University and had a sleepy, academic feel, with panels devoted to explaining or making the case for a technology that still seemed obscure. This year, its attendance and square footage had more than doubled from the last time it was held in 2019. “We’ve gone from ‘Is this magical internet money for real?’ to ’No question, this is definitely a thing,’” the Digital Chamber’s founder and president, Perianne Boring, proclaimed from the stage.
The industry has spent the past year making a major play for D.C.’s attention and affection—a sea change for the utopian technology, with its animating vision of frictionless, borderless, intangible exchange. Bitcoin has been around for more than a decade, but until recently the rapid growth of an industry valued at $3 trillion at its peak has operated at arm’s length from the government—an arrangement that seemed to satisfy both sides.
Now D.C. has moved into crypto’s territory, with regulatory crackdowns, tax proposals, and demands for compliance. And crypto has pushed into D.C.’s terrain, standing up multiple trade associations, think tanks, and political action committees and hiring hundreds of lobbyists. “The industry has gone from 0 to 100 in record time,” says one D.C. consultant who advises crypto and other tech firms and has seen business skyrocket in the past year. “Even small companies have some footprint now. The venture capital firms are stacked like cordwood with former regulators.”
A collision is under way—not just the usual maneuvering between government and business, but a clash of radically different cultures. To crypto’s whiz-kid techno-futurists, the stodgy pencil-pushers of the Washington bureaucracy are nothing but a hindrance. To Washington’s straitlaced rule-makers, crypto’s wild, utopian promises are merely cover for dangerous fads and scams. The still-unknown potential of an ephemeral new technology has run up against the power of the state, and neither quite understands how the other works.
How it shakes out will have major implications for the future of the economy and technology in America and the world. Right now, cryptocurrency exists in a legal gray area, scarcely mentioned in federal code. That has left financial regulators to try to interpret definitions created for ordinary markets and apply them to a nascent technology. The most prominent such dispute is over whether cryptocurrencies and related products should be categorized as securities—investments, like stocks and bonds—or commodities, interchangeable assets like oil or grain.
At stake in the definition is whether crypto entities are regulated by Peirce’s agency, the SEC, or its smaller sister agency, the Commodities Futures Trading Commission (CFTC). Both agencies have asserted jurisdiction without issuing any official guidance about where they believe the lines ought to be drawn. SEC Chairman Gary Gensler has stiff-armed companies that try to ascertain their status, only to turn around and sue them for failing to comply with securities laws. This is the “enforcement-first approach” Peirce was describing, and it has drawn loud complaints and major lawsuits from the crypto industry. (Gensler, appointed by President Biden, isn’t technically the boss of Peirce, appointed by President Trump, since commissioners are independently appointed and confirmed, but he is her superior; differences of opinion are common on the bipartisan panel.)
The inter-agency pissing match is the subject of endless speculation and argument among crypto people, but it’s important less in its particulars than what it signifies: would-be crypto innovators who are not trying to scam anybody have no way to be confident they’re following the law. Industry advocates warn that the resulting confusion not only hurts consumers but also damages a sector that acolytes say holds the keys to a technological revolution akin to the invention of the Web.
U.S. crypto companies want to comply with the law, the industry says, but instead have been bankrupted or driven offshore by regulators’ approach. “We need a definition of which digital assets are securities or which ones are not,” the Digital Chamber’s Boring says in an interview. “The SEC has said, ‘We’re not going to tell you which ones meet our test, but make no mistake, we will come after you if you guess wrong.’ We have companies that want to be regulated, but they need to know who the regulator is, and if they are going to be regulated by the SEC, they need to know how to register. A lot of projects are in complete limbo today, and it has forced a significant amount of business activity outside of the United States, because they’re not willing to operate in a gray area with potential enforcement hanging over their head.”
D.C. is beginning to listen. On Sept. 15, the Senate agriculture committee held the first hearing on the Digital Commodities Consumer Protection Act, a bipartisan proposal coauthored by Senators John Boozman and Debbie Stabenow. The bill is one of numerous crypto-related pieces of legislation introduced on Capitol Hill in recent months—Boring counts more than 60, with more in the process of being drafted. Meanwhile, on Sept. 16, the White House released its first-ever framework for crypto regulation, a follow-up to a first-of-its-kind March executive order in which President Biden directed agencies to research and report on the matter. The Blockchain Summit’s program featured four senators and three members of Congress, almost evenly divided between the parties.
The industry says it wants rules it can live with; policymakers say they want to protect consumers and foster innovation. Those goals would seem to be compatible. But this is D.C., where finding common ground can come with its own costs. “When politicians say, ‘We hope to get this done by the end of the year,’ what I hear is ‘We want crypto lobbyists at our next fundraiser, and we’re going to milk this for at least three Congresses,’” a veteran D.C. tech lawyer says, speaking on condition of anonymity in order to be frank about how Washington really works. As soon as the law gets passed, the spigot of money turns off, or at least down. “It’s worth noting,” the lawyer says, “that in the California gold rush, the folks who supplied the picks and shovels and donkeys made a lot more than the miners.”
There’s a common saying on Capitol Hill: if you’re not at the table, you’re on the menu. The crypto industry discovered this principle in remarkably literal fashion last year.
In August 2021, a bipartisan group of senators was negotiating infrastructure legislation to fund roads, bridges, and broadband across America. To pay for all this, the senators consulted a “menu” of revenue options staff had prepared. Among them was a tax on cryptocurrency brokers that would raise an estimated $5 billion. The lead Republican negotiator, Rob Portman of Ohio, picked it off the list, sources familiar with the process confirmed.
Crypto firms who would be affected by the provision were blindsided and scrambled to mount a response. The unexpected fight stalled the bill’s passage as exhausted senators worked around the clock to finalize the legislation. Lawmakers sympathetic to the industry proposed a compromise, but just when one seemed imminent, Republican Senator Richard Shelby of Alabama nixed it to protest the blockage of an unrelated bill. The tax went through. (Industry leaders remain hopeful that the provision, which is set to take effect next year, can be repealed.)
The episode was a dramatic demonstration of crypto’s political vulnerability. “It was a last-minute addition, and all these crypto lobbyists were like, ‘Wait, what’s going on?’ They were asleep at the switch, basically,” says Avik Roy, president of the Foundation for Research on Equal Opportunity, a conservative think tank. Old pros like the pharmaceutical lobby, he notes, know that the time to stop Congress from doing this sort of thing is to keep it off the menu. “The crypto people did make a lot of noise, but it wasn’t enough to change the trajectory, which shows they were still pretty politically weak.”
Representatives of numerous major blockchain companies cited this as the industry’s “aha” moment. “That was when people woke up and realized they’ve got to get involved,” says a lobbyist for a major crypto group. Determined not to let it happen again, the industry went on a spending spree, hiring platoons of lobbyists and advocates—many of them former policymakers and regulators fresh from the revolving door—and mounting a full-court press on D.C. The Chamber of Digital Commerce is the oldest blockchain trade association, but these days its competitors include the Blockchain Association, the Association for Digital Asset Markets, and the Crypto Council for Innovation. All have grown rapidly over the past year, flush with money from member companies suddenly desperate to have a voice in the policy process.
Industry bigwigs, such as FTX CEO Sam Bankman-Fried and the venture capitalist Marc Andreesen, made major contributions to a handful of new political-action committees—$500,000 to $1 million was the baseline expectation. GMI PAC, the most prominent, backed by Trump Administration official-turned-crypto dabbler Anthony Scaramucci, has raised more than $10 million since its founding in January. Few expect these vehicles to play a major role in electoral politics; despite some wishful thinking, there’s little evidence crypto is a top concern for most voters. It’s more about demonstrating that the industry knows how the game is played. “All the leaders in crypto, almost to a person, have been very intentional about trying to show that they have skin in the game,” says a D.C. tech policy leader. “Left to their own devices, they want nothing to do with Washington, but they’re coming around to the idea that it’s necessary and coalescing around a small handful of super PACs and donation platforms. They want in aggregate to send the message that the industry has matured and engaged.”
Fending off unwanted taxes might have been the trigger, but the goal now is to do more than play defense. While many countries have a single, centralized regulatory body that oversees financial products, the U.S. system is fragmented, with an alphabet soup of different regulators. Gensler has become an outsize player in this dispute—the industry’s Public Enemy No. 1.
A former Goldman Sachs partner, Gensler has served in government since the Clinton Administration and headed the CFTC during the Obama years. When Biden named him to lead the SEC, many crypto players were hopeful that he would bring needed expertise. Instead, they charge, he has mounted wide-ranging and arbitrary crackdowns while rebuffing calls for clearer rules. (Gensler, through a spokesperson, declined to comment for this story.) In an August Wall Street Journal column, Gensler wrote, “There’s no reason to treat the crypto market differently from the rest of the capital markets just because it uses a different technology.” In a Sept. 8 speech, he added, “Some in the crypto industry have called for greater ‘guidance’ with respect to crypto tokens. For the past five years, though, the Commission has spoken with a pretty clear voice,” through its orders and enforcement actions. “Not liking the message isn’t the same thing as not receiving it.”
Crypto insiders find this position maddening. “We’ve seen Gary Gensler state many times that we do have clarity, but we don’t,” says the Digital Chamber’s Boring. “I represent over 200 businesses that have to navigate these laws, and I haven’t had one tell me that we do. I believe the SEC is the number one blocker to economic progress not only for the crypto space but also for our economy, because they’ve refused to put forward a framework for digital assets and to bring clarity. It’s holding back economic innovation, and it’s harming investors as well.”
Without explicit rules, companies say they’re forced to parse Gensler’s public statements for clues. Even crypto skeptics who want scammers kept in line can see the benefit of knowing what, exactly, the government considers a scam, versus a legitimate enterprise. “Gary is out there stating over and over again, ‘I have jurisdiction over all of this, everyone needs to come in and register [with the SEC],’” says a lobbyist for a top crypto platform. “Well, people have tried to do that, but the staff is not helpful.”
Coinbase, a publicly listed crypto exchange, has been blocked from issuing a bitcoin lending product and separately sued for alleged insider trading. BlockFi was fined $100 million for issuing an unregistered yield product, while two other companies, Celsius and Voyager, were threatened with lawsuits but went bankrupt instead. As the Bloomberg financial columnist Matt Levine has noted, the SEC seems to target companies that are trying to go legit, rather than obvious fly-by-night scammers. ”It is conspicuously the case that Gensler’s SEC mainly goes after the more law-abiding crypto actors,” Levine wrote. “Gensler’s posture is that he should be in charge of writing the rules for crypto, but not write them. I don’t see how that can work. “
Lacking regulatory guidance, the industry has turned to Congress to create the rules of the road. Many are pressing lawmakers to give the CFTC primary authority, sparking criticism from crypto skeptics that they’re venue-shopping for a less formidable regulator that would presumably take a less aggressive approach. (CFTC Chairman Rostin Benham pushed back against that perception at a recent congressional hearing: “We are one of the toughest cops on the beat in the world,” he said. On Sept. 22, the CFTC filed a first-of-its-kind lawsuit against the Ooki decentralized autonomous organization, or DAO, sparking fears of a broader crackdown.) Boring insists that any rules at all would be preferable to the current situation. “We would like to see a definition of a digital asset security,” she says. “That really would solve the majority of the issues that we have. It’s really quite simple.”
Crypto founders are an idealistic bunch, and many are philosophically committed to a techno-libertarian ethos that shuns government involvement, says Alan Konevsky of the blockchain trading platform tZERO. But as a practical matter, they’re coming around to the need for regulation. “Setting aside some of the maximalist libertarian types, most responsible participants—whether they’re pioneers who survived and made big or traditional finance entities looking to enter the space—all support positive regulation,” he says. “The consensus is that it’s not about whether but how you regulate.”
The situation reminds many observers of the 1990s, when the internet was new and barely regulated and Silicon Valley went gangbusters—until it crashed in the early 2000s, leaving major sports teams with stadiums named for defunct companies. A few titans emerged from the wreckage to become today’s tech behemoths: Amazon, Google, Facebook. In what might be a cautionary tale for Web 3.0, lawmakers are still struggling to rein them in, and public sentiment has turned sharply negative. “The internet had the advantage that everyone believed their bull—t for a long time,” the veteran tech lawyer says. “This amazing new technology is going to change the world and bring everybody together! Then we found out, yes, it’s transformed the world, but it’s brought a whole bunch of new problems.”
“I am not a fan of Bitcoin and other Cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air,” Trump wrote. He expressed concern that they could “facilitate unlawful behavior” and singled out Facebook’s plans to create a virtual currency called Libra. “We have only one real currency in the USA, and it is stronger than ever,” Trump concluded. “It is called the United States Dollar!”
The U.S. President condemning your whole sector might seem like a discouraging development, but Perianne Boring was ecstatic. She printed out the tweets, mounted them in big gold frames, and hung them in her office, where she refers to them as “the crown jewels.” “It was the first time a sitting president tweeted about bitcoin. So I was like, well, at least we’re relevant!” she says.
The Trump Administration’s stance toward crypto largely reflected the former President’s disdain. But on Capitol Hill, crypto’s loudest skeptics have been on the left, particularly Senator Elizabeth Warren, who famously derided the industry as a “shadowy, faceless group of supercoders.” The congressional blockchain caucus, which was started in 2016 by then-Reps. Mick Mulvaney and Jared Polis and now boasts nearly 40 members from both parties, is about two-thirds Republican. Ideologically, GOP crypto boosters tend to focus on the potential economic opportunity while Democrats tend to highlight the need to protect consumers. But so far the industry has succeeded in being seen as nonpartisan, which benefits its interests. The political divide over crypto, insiders say, tends to be more generational; older lawmakers often find blockchain technology befuddling. “We’ve got people out there investing in this and don’t have a clue what they’re doing, including me,” Republican Senator Tommy Tuberville said at a recent congressional hearing on crypto legislation.
The Biden Administration has made more favorable noises than its predecessor. In March, the President issued an executive order directing agencies to research the risks and benefits of crypto. “The United States must maintain technological leadership in this rapidly growing space, supporting innovation while mitigating the risks for consumers, businesses, the broader financial system, and the climate,” the White House said. This was a major milestone for the industry: not just recognition, but an acknowledgement that crypto is here to stay and has significant upside.
“When there began to be chatter in D.C. around the White House putting something out, many people were concerned it might be quite punitive, but it ended up being something that most view as positive,” says Michael Sonnenshein, CEO of Grayscale, a publicly traded bitcoin investment fund. Now the Administration has followed up by issuing its proposed regulatory framework, aimed at “laying the groundwork for a thoughtful, comprehensive approach to mitigating digital assets’ acute risks and—where proven—harnessing their benefits,” according to a joint White House statement by Brian Deese, director of the National Economic Council, and National Security Advisor Jake Sullivan. (The framework directs both the SEC and CFTC to “aggressively pursue” misconduct, but does not take a position on the question of jurisdiction.)
Things are moving on Capitol Hill too, albeit slowly. In June, a bipartisan pair of senators, Cynthia Lummis and Kirsten Gillibrand, released a wide-ranging bill covering all aspects of crypto regulation; it would define and expand the CFTC’s authority while leaving some digital securities under the SEC’s purview, and also would create new rules for NFTs, stablecoins and other blockchain-related products. Lummis, a conservative Republican from Wyoming, has been dubbed the Senate’s “crypto queen.” Gillibrand, a liberal Democrat from New York, joined the push earlier this year, pointing to her state’s centrality to the financial industry. Other prominent efforts include the House agriculture committee’s Digital Commodities Exchange Act, introduced in April, and the Senate agriculture committee’s Digital Commodities Consumer Protection Act, introduced in August. While the Digital Chamber counts 68 current crypto-related pieces of legislation, aides involved in the process consider those the top three currently introduced.
Most observers see these major bills as complementary rather than in competition, and expect them to take time to work through the process. Gillibrand and Lummis have said their measure might have to go through four different committees and indicated they expect it to eventually be broken up into component pieces and modified rather than passed wholesale. Some are hopeful that legislation on stablecoins or regulatory jurisdiction could be attached to must-pass bills in Congress’s post-election lame-duck session. The top Democrat and Republican on the House banking committee, Maxine Waters and Patrick McHenry, have been working for months to draft a bipartisan stablecoin bill, but it has yet to see the light of day.
At the D.C. Blockchain Summit, the excitement was palpable. “Bring these geniuses back on our soil!” Kevin O’Leary of ABC’s “Shark Tank” hollered onstage, rueing the business brains that have allegedly been lost to offshore havens. Two algorithmic stablecoins had just crashed, wiping out a trillion dollars in value, and a “crypto winter” of crashing prices was on the way, but everyone seemed to be taking it in stride. By afternoon, with cocktail hour looming, a brave new future of legal crypto working hand in hand with the regulatory state seemed within reach. Then Michael Hsu got up to speak.
Hsu, whose title is acting comptroller of the currency, opened a folder on the lectern and began to read a tersely scripted speech. With center-parted black hair, oval glasses and a neat suit and tie, Hsu looked every inch the bureaucrat. He was there, he said, to provide “a bank regulator’s perspective.” (Despite its name, the Office of the Comptroller of the Currency, a division of the Treasury Department, does not issue currency—the Federal Reserve does that. Rather, it charters banks.) It quickly became clear that he had not gotten the Brave New World memo.
Hsu said he had grave concerns about what he had observed from the world of cryptocurrency. It posed a contagion risk to the broader financial sector; it was a good thing it was under tight oversight by the SEC; it was too dependent on hype and Ponzi schemes. “The industry has grown too fast,” he said, “and recent events should be a wake-up call.”
Crypto may believe its time has come. But Washington is not so sure—and Washington still has the upper hand.