At a moment when Congress is finally debating whether and how to seriously regulate the cryptocurrency industry, a split appears to have formed in the Democratic Party. Some of its lawmakers are contemplating how to harness blockchain technology into a force for innovation, while scaling back its early excesses.
Then there’s a group you might call the “bullshit caucus.”
“It’s all bullshit,” Sen. Jon Tester, D-Mont. told Semafor. He was wary of the industry even before the recent collapse of crypto exchange FTX, he said, and recent meetings with advocates have not given him any more confidence in its fundamental value. “I don't think it passes the smell test. I can't figure out what supports it.” (FTX founder Sam Bankman-Fried is an investor in Semafor.)
“Finally, there are more people blowing the bullshit whistle,” Sen. Elizabeth Warren, D-Mass. said in a Wednesday interview. “There's been a lot of lobbying around Congress and an effort to try to scare off lawmakers. To say ‘Oh, crypto is just so complicated. No one can understand it. Let the crypto world remain unregulated.’ That is precisely the argument that was made in the run-up to the 2008 crash.”
Sen. Bernie Sanders, D-Vt. skipped the profanity, but echoed the sentiment. “I’m not a big fan of cryptocurrencies,” he told Semafor. Sen. Sherrod Brown, D-Ohio, who heads the powerful Banking Committee, was equally dismissive. “Clearly, they've not shown a real public purpose for their existence,” he said. “They made some people rich, they made a lot of people lose money.”
The sudden willingness of some lawmakers to freely and openly trash the industry underscores the immense amount of scrutiny that is about to hit crypto on Capitol Hill. The Senate Agriculture Committee is holding a hearing on Thursday focused on what lessons can be drawn from the FTX collapse. It’s the first in what’s expected to be a spate of Congressional hearings meant to probe the company’s wreckage. The House Financial Services panel scheduled another FTX-related hearing for Dec. 13.
“I do think that the industry is left here to pick up the pieces,” Kristin Smith, executive director of the Blockchain Association, told Semafor. “It’s really incumbent upon us to explain that what happened with FTX International is very different from the way the rest of the industry operates.”
Smith said crypto lobbyists were “not getting doors [shut] in our face, at least not yet.” She’s been making the case that crypto remains in its infancy and still promises future innovations for businesses and consumers.
Smith’s worst case scenario is one in which legislation smothers a key part of crypto’s allure for its most ardent boosters: decentralized finance, otherwise known as DeFi. It’s a digital-native financial system in which blockchain (a form of software) replaces traditional intermediaries like a bank to process customers’ transactions.
“My fear is that there will be an attempt to regulate every single entity in crypto as opposed to targeting those where we've seen the failures happen,” Smith told Semafor. She slammed a bill from Sens. Debbie Stabenow, D-Mich., and John Boozman, R-Ark., arguing that it would impose a “de-facto ban on DeFi.”
Smith’s concerns point also to tensions within the crypto industry that could hamper it from putting up a united lobbying front. While some corners of the digital currency world fear it, Stabenow and Boozman’s bill has also enjoyed support from large, centralized crypto trading platforms, since it would give them a clear regulatory framework to operate under for the first time in the United States.
It would also grant a major industry wish by handing oversight of crypto to the Commodity Futures Trading Commission, and treating it as a commodity instead of a security that’s more regulated, such as a stock or bond.
Some critics, like Securities and Exchange Commission Chair Gary Gensler, have recently lambasted the bill for being too lax, and criticized its close association with Bankman-Fried, who was a strong backer. Among lawmakers, Warren has been particularly unsparing.
“The CFTC has no experience in investor protection which makes them the worst possible candidate for regulating a financial product that has been used to rip off millions of people,” she told Semafor.
But other key players in Congress are swiping at the bill as well.
“A clear regulatory framework in the U.S. will ensure more trading platforms are domiciled in America and subject to our laws and regulations,” Rep. Patrick McHenry, R-N.C., the ranking Republican set to chair the House Financial Services panel next year, said in a statement to Semafor. “The actions of FTX and Alameda Research should also serve as a warning to Congress that we cannot allow this industry to pick its own regulator.”
Boozman defended his bill to Semafor. “What we did — it's not a matter of picking their own regulators,” he said. “All we’ve done is gather information.”
Still, the nascent crypto-skeptic caucus within the Democratic Party may pose significant problems for industry groups hoping for a wider reach and mainstream acceptance. And the harshness of the criticisms — Brown told Semafor that, along with being economically useless, crypto has created “real concern on national security” — suggests there may be some desire on Capitol Hill to stamp the industry out entirely.
“Ultimately, it's not that complicated,” Warren said. “The fact that much of the crypto world wants to hide out from regulators and from the ordinary rules that apply throughout the financial markets should be a big red flag — that the way they're making their profits is not by offering value, but by providing a home to the scammers and money launderers.”
It’s going to be extremely difficult for the crypto industry to escape the shadow of FTX for years to come, especially if crypto-skeptic policymakers who are comfortable with walling off crypto or letting it burn out like a forest fire draw a critical mass of supporters.
But that doesn’t necessarily mean that regulations are going to be rolled out within the next few months. In the wake of the 2008 financial crisis, it took over a year for policymakers to impose guardrails on the banking giants which crashed the US economy, and there’s less urgency around crypto given that its crash has barely affected the rest of the economy.
“It’s a Lehman moment within crypto,” Treasury Secretary Janet Yellen said on Wednesday at the New York Times DealBook summit, referring to the 2008 bankruptcy of the Wall Street bank Lehman Brothers that ignited the financial crisis.
Sen. Michael Bennet, D-Colo., who sits on the Senate Agriculture panel, said in an interview he was still undecided on whether he supported the Bozeman-Stabenow bill. “I do think the fact that its origins are what they are, they’re going to create an opportunity for all of us to take a look at figuring out whether it's really doing what we need for consumers, whether it's really doing what we need for the broader economy.”
Warren suggested that she may release her own crypto regulation bill sometime in the future, telling Semafor that she is “working in this space.”
Room for Disagreement
There are a number of lawmakers still interested in regulating cryptocurrency while ensuring there’s a place for it within US shores. For instance, Sens. Kirsten Gillibrand, D-NY. and Cynthia Lummis, R-Wyo. are pushing a separate bipartisan bill to impose tighter rules on crypto exchanges and bar them from using customers’ deposits to prop up their own investments. Meanwhile, there’s no real sign that many Republicans have moved over to the anti-crypto camp.
“Every indication that I've gotten from members that have been working on this stuff for a long time, is they still really want to balance the need for consumer and investor protection and appropriate guardrails that bring certainty to the markets in the US, promoting innovation and keeping that here in the US,” Brett Quick, the head of government affairs at the Crypto Council for Innovation, told Semafor, adding that the next year may see the arrival of “Crypto Congress.”