Crypto firms gear up for battles over new rules in Washington


As soon as this month, the Treasury Department is expected to begin clarifying which firms will need to report user information under the infrastructure bill. — AFP

The cryptocurrency industry is bracing for an onslaught of regulatory and enforcement action this year, flooding Washington with money, snapping up lobbying firms, and building up their trade associations in an effort to curb new rules.

After a decade of scant attention from regulators, crypto companies are facing increasing pressure to hire lobbyists in Washington to play defence. The Securities and Exchange Commission and the Commodity Futures Trading Commission have made it clear they’ll take more action against companies that they say are violating their rules, while others such as the Internal Revenue Service, Office of the Comptroller of the Currency and Federal Reserve have said they plan to soon issue new rules that could have a dramatic impact on the industry’s profits.

"They’re going to be having a busy year,” said Owen Tedford, an analyst for Beacon Policy Advisors in Washington. "It’s pick your poison. There are going to be a million different things this year from regulation to legislation” for crypto lobbyists to deal with.

As soon as this month, the Treasury Department is expected to begin clarifying which firms will need to report user information under the infrastructure bill. Early this year, the Federal Reserve will also likely release a long-awaited report on how a digital dollar might fit into the US’s longterm plans for its payments system.

Meanwhile, multiple agencies could release related guidance on how they plan to treat stablecoins, a type of cryptocurrency whose value is most often pegged to the dollar. The SEC has also said it plans to bring more actions against crypto firms that it claims are issuing or dealing in securities without registering with the agency.

The recent downturn in the price of Bitcoin and other cryptocurrencies could increase pressure on regulators as some investors suffer heavy losses. The price of Bitcoin on Monday hovered just above US$41,000 (RM172,036), off nearly 40% from its high in November.

Dapper Labs, a Vancouver-based company that helps create and sell non-fungible tokens, registered its first lobbying firm, Crossroads Strategies, last week. The company also recently hired FS Vector, according to a person familiar with the matter, though that firm hasn’t registered. The first lobbyist for stablecoin company Circle Internet Financial registered in November, and one of its competitors, Paxos Trust Co, also recently hired its first firm. Crypto mining firm Marathon Digital Holdings also registered its first lobbyist last week.

Some crypto executives say they’re also ramping up political giving in an effort to elect candidates they think are most likely to support pro-crypto policies.

On New Year’s Eve, Jesse Powell, the chief executive officer of cryptocurrency exchange Kraken, asked his Twitter followers for ideas for campaign contributions and put together a list of 15 candidates to give the maximum allowable donation. Powell, whose crypto exchange is the fourth-largest, said he gave money to the campaign committees of Republicans, including Ohio Senate candidate Josh Mandel, and Democrats such as California Congressman Ro Khanna. On other issues the two lawmakers would be considered fierce rivals.

Donations from crypto executives are quickly becoming an important source of cash for some lawmakers. In the first three quarters of 2021, about a third of contributions to Wyoming Republican Cynthia Lummis’s campaign committee came from crypto executives or investors. Lummis, who doesn’t face re-election until 2026, says she’s planning this year to introduce legislation that among other provisions would allow crypto firms to set up their own self-regulatory organization. Donors to her campaign last year included Charles Cascarilla, CEO of stablecoin firm Paxos, and W. Bradford Stephens, managing partner of venture capital firm Blockchain Capital.

Democrats have also received hundreds of thousands of dollars in contributions, often from the same executives. In the first nine months of 2021, Arizona Senator Kyrsten Sinema, who with Lummis launched the US Senate Financial Innovation Caucus, received at least US$107,100 (RM449,445) from crypto executives and investors.

Crypto firms or associations with longer-standing operations in DC are also ramping up their lobbying spending. Coinbase Global Inc, the largest US crypto exchange, spent US$625,000 (RM2.6mil) in the third quarter, according to the most recent figures available, up from US$60,000 (RM251,790) a year earlier. The Blockchain Association said it spent US$210,000 (RM881,265), nearly twice as much as the year before. Much of that quarter’s activity was related to the unexpected inclusion of new tax-reporting requirements in last year’s US$1 trillion (RM4.2 trillion) infrastructure bill.

Some crypto advocates say last year’s push is starting to pay off. In December, a House Financial Services Committee hearing on cryptocurrency included very few lawmaker attacks, leading Jake Chervinsky, head of policy for the Blockchain Association trade group, to describe it as the "most positive, constructive, & bipartisan public event on crypto I’ve seen in Congress - ever.”

"The tone around crypto has absolutely turned a corner for the good in Washington,” said Kristin Smith, executive director of the Blockchain Association, which has more than doubled its members to 70 in the past year. Smith said the association has been in regular touch with lawmakers working on crypto-focused legislation and with agencies writing rules around tax reporting requirements and anti-money-laundering provisions, among other issues and plans to increase its meetings with lawmakers this year.

Though several lawmakers have said they plan to introduce crypto-focused legislation, the more immediate challenge for blockchain firms and investors will be to shape regulations expected from banking, securities and tax regulators on the docket this year, said Tedford from Beacon Policy Advisors.

Tedford said that unlike at this time last year, most important crypto firms seemed to have at least some presence in Washington, whether independently or through a trade association, but that senior executives at crypto firms didn’t yet seem to have garnered the same level of experience with shaping policy that executives in other industries have. – Bloomberg

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