In September, after watching nonresponses to disingenuous Senate questions, FIN wrote:
a Congressional hearing is typically a poor venue for gaining insight into the American financial regulatory system. Even when the events are not contentious, they can seem like experiments to concoct a maximum number of ways for people to talk past one another.
Those remain reliable watchwords, but a recent House Financial Services Committee hearing on cryptocurrency showed that it doesn’t always have to be an exercise in bad faith. The four-plus-hour hearing, with several crypto executives as witnesses, was almost entirely civil in tone—if anything, some of the witnesses could have been grilled much harder—and touched on a wide range of subjects in ways that were genuinely edifying. We’ll get to a broader, arguably troubling theme in a moment, but it’s worth cataloguing several legitimate policy issues aired during the hearing.
At what point should we be concerned about the possibility of a bubble? With the massive growth of cryptocurrency, this question from Al Green (D-TX) seemed pretty relevant. Brian Brooks, the CEO of Bitfury and the former acting Comptroller of the Currency, provided a solid, if not bulletproof, answer: crypto volatility stems a lot from being a relatively new and thinly traded market. Much of what provides stability in, say, equities markets is an ecosystem that provides a lot of price discovery: mutual funds, futures, derivatives, etc. He also claimed that some 80% of Bitcoin holders, for example, have never sold any of their holdings, and therefore days or weeks when Bitcoin tumbles can often be attributed to a very small number of people (even one) selling. Therefore, he argued, what the crypto market needs is more liquidity and price discovery, not less.
What effect will the growth of crypto have on community banks and minority-owned depositary institutions? This question from Greg Meeks (D-NY) turned into a bit of a commercial for Circle Impact, an ambitious initiative announced last month by Circle, which operates USDC, the second-largest dollar-denominated stablecoin. Circle CEO Jeremy Allaire explained that because Circle isn’t a lending institution, it intends over time to allocate billions of dollars worth of USDC to minority-owned and community lenders, to shore up their balance sheets and, ideally, create more capital for underbanked communities. The program has yet to get off the ground, but using crypto to enhance financial inclusion is an area where Congress can at least theoretically play a useful role.
Does cryptocurrency represent a threat to the dollar’s status as the world’s reserve currency? This concern came from Blaine Luetkemeyer (R-MO), and presents a tricky challenge to the way that a lot of people think about crypto. That is, US crypto advocates talk about the need for monetary innovation, and the need to keep that innovation inside the US, not drive it abroad. But if the US dollar—even in a future digital form—has to compete in a global marketplace on the basis of its features (as opposed to the hegemonic status that Bretton Woods conferred upon it), then there is no guarantee that it will beat Bitcoin, or the digital yuan, or some currency that hasn’t been invented yet.
Brooks, at a minimum, has thought about the question. “I’ve said for a long time that the secular reduction in dollar holdings as a percentage of global central bank holdings is alarming,” he said. Actual solutions, however, seemed in short supply.
Should stablecoins, until future legislation might deem otherwise, be regulated as commodities? Sean Casten (D-IL), referring to the federal government’s recent report on stablecoins, asked this, noting that the legal protections to make stablecoins behave like a currency are not now in place. Allaire gave a reasonably plausible “no” answer, pointing to a number of existing regulatory requirements that treat USDC the same way that cash transactions on Square or PayPal are handled.
Largely absent from the hearing was the kind of swashbuckling, Muskian sneering at the very idea of regulation. Indeed, FTX CEO Sam Bankman-Fried said explicitly that there were certain consumer protections around crypto trading that he would welcome, and that would benefit the crypto industry.
Despite such comity, the hearing did surface a burgeoning theme of conflict. Ranking member Patrick McHenry (R-NC) alluded to it in his opening statement: “My fear is that we’ll have a partisan divide.” Some Democrats, he said, may already have made up their minds about crypto, and intend to file regulatory laws that will stifle or kill crypto innovation in the US. A cynic might point out that McHenry may actually welcome such a divide; at least since the middle of the year, there has been a palpable sense in some public settings that Republicans want to champion and enable the cryptocurrency ecosystem, while Democrats want to attack it, or at a minimum regulate and tax it.
An opinion piece this weekend on the Decrypt site used the headline “Democrats Are Blowing the Bitcoin Vote.” It argued:
Republicans are becoming the party of crypto, while Democrats are earning a reputation as anti-crypto….This is a terrible mistake….Why are Democrats opposed to crypto? Their hostility may be rooted in the libertarian leanings of many early crypto adopters, few of whom are inclined to support a party associated with big government. What they’re missing is that Bitcoiners will happily support any politician who supports Bitcoin, no matter how flawed, from Nayib Bukele to Ted Cruz.
There are some questionable assumptions here, such as the idea that “the Bitcoin vote” represents in any given non-national election a sufficient, freestanding constituency of any importance. It does seem to be the case, at least for now, that crypto owners have no automatic party allegiance. A Morning Consult poll released this week found that “61 percent of crypto owners say they voted for Biden last year, compared to 32 percent who say they voted for former President Donald Trump.”
And neither is it clear that regulation is an especially partisan issue: “Notably, 45 percent of Democrats and 58 percent of Republicans didn’t know or had no opinion on the amount of cryptocurrency regulation.”
But that picture may change as crypto companies become bigger players in the political arena. Especially this summer when it emerged that the proposed (and now passed) infrastructure law targeted crypto brokers, the crypto industry has frantically increased the amount of time and money it spends on federal lobbying:
Membership has risen from 28 firms to 65 since January 1. Meanwhile, the 2020 budget that was just shy of $2 million has gone up to nearly $8 million, according to executive director Kristin Smith and the association’s most recently filed 990 forms. Among the most recent members are Solana Labs, Republic, Dapper Labs, Tacen and Messari.
Here’s a safe bet: with Congressional elections coming next year, that $8 million figure is going to balloon. Indeed, with all of the cyberwealth looming around the cryptocurrency industry, it is increasingly likely that individual members of Congress will raise substantial piles of campaign cash from crypto firms.
Cynthia Lummis may be a small indicator of what the future looks like. Elected last year as the junior senator from Wyoming, Republican Lummis has developed a reputation as a crypto advocate. Keeping in mind that Wyoming campaign spending is relatively small and that Lummis doesn’t face re-election until 2026, it’s still interesting to note who is donating to her campaign. A recent investigation by The Block (behind a paywall) found that a majority of the individuals who have donated to Lummis’s campaign work for firms that The Block deems either “crypto native” (such as the CEO of Kraken) or “crypto adjacent.” The crypto industry has lots of money to spend, and important policy issues at stake; look for more Lummis scenarios in next year’s elections.
This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.