Political Realignment and Regulatory Evolution Pave the Way for Blockchain Innovation in the Nation’s Capital

Could DC become the crypto capital of the world? There are some early indications that both political parties are starting to align on the importance of a smart crypto policy. The result could be a bi-partisan move to a need for a light touch regulatory environment that is cognizant of and responsive to the needs to fight crime/fraud/money laundering but remains open to innovation.

Over the last 2 weeks there has been a noticeable shift in the politics of blockchain. It may be that both political parties will align and start competing to see who supports smart blockchain innovation the most.

This could just be the logical outcome now that over 52 million American’s own some crypto. Many of us believe our property rights should extend to things like cryptocurrency. For years a minority in Congress were pushing pro-crypto concepts and a small bi-partisan group began educating themselves and others on the issues. Another small group, let by Senator Elizabeth Warren, declared that fighting for American families meant fighting crypto. In March 2023 she said she was “raising an anti-crypto army.” The Biden administration seemed to be taking several actions to thwart cryptocurrency adoption, a topic we have written about before which has been doing little to nothing to fight real fraud and driving many innovators overseas.

Regarding the SEC, they are an independent agency but its political appointees are influenceable and they have clearly been anti-crypto. It was like pulling teeth to get them to admit that Bitcoin was not a security for them to regulate and that a Bitcoin ETF could be approved.  It was even harder to get them to think that was about Ethereum. But they just announced a surprising shift in their views on Ethereum and it looks like they are about to approve an Ethereum ETF.

Many in the crypto community believe the SEC shifted their position here because of the politics involved. Donald Trump starting to bash Democrats for their stance while an increasing number of Democrats are distancing themselves from Senator Warren. One former CFTC regulator said at the DC Blockchain summit last week that Donald Trump has earned the title of “First Crypto President” because of what he did in 2017 and what he is now doing on the election trail. This statement as last week’s DC Blockchain Summit got lots of attention and really seems to have caused politicians sitting on the sidelines to realize that crypto currency and digital property rights should not be a partisan issue. Overall what started as a partisan attack shifted more towards bi-partisan support of crypto.

On Capital Hill, some interesting Bills are working their way through the House and Senate.  One important one is FIT21, the Financial Innovation and Technology for the 21st Century act (HR4763), which is getting bi-partisan support. It is designed to bring clarity and safety to blockchain. The President had said he would veto it if passed.  But today the White House issued a statement saying although they do not support it they will work with Congress on it. It is being interpreted as saying they will not have the President veto it. See attached.

Regarding the Bill, it helps define what will be considered a security and what will be considered a commodity.

• It aims to split crypto regulation duties between the SEC and CFTC.
• The proposed bill has a “decentralization test” that will determine whether a token is a security or a commodity. If not person or entity has more than 20% control over the blockchain its tokens, even if valued, cannot be considered a security.
• Crypto securities will be regulated by the SEC, while crypto commodities will be regulated by the CFTC.
• The proposed bill will allow crypto tokens to decentralize over time to become a commodity.
• SEC Chair Gary Gensler slammed the FIT21 bill saying that it puts investors and capital markets at risk.

Another topic is Congressional oversight of the SEC. As mentioned above, officially the SEC is supposed to be an independent agency, they are to follow the law and court cases. But in some instances it seems they have been establishing policy themselves. One case is in a memo they issued called SAB 121 (Staff Accounting Bulletin 121).  This bulletin has significant implications for banks and consumers by confusing the distinction between customer and bank assets and increasing bankruptcy risks for consumers. The Government Accountability Office (GAO) found that the bulletin effectively functions as a rule, which should have undergone public comment and coordination with federal banking regulators before implementation. SAB 121 requires financial institutions to recognize digital assets in ways that reflect poorly on banks, making them hesitant to hold them.  The US Senate approved a joint resolution overturning this memo. For weeks, President Biden has said he would veto this, citing concerns about financial stability.  But with the shifting views towards digital property in an election year he may let it pass.

We have been tracking blockchain as a technology with a high disruptive potential which is even more interesting when considered in context with other rapidly shifting technologies like AI and Biotech and of course cybersecurity technology. It will no doubt be a continued topic of our research, reporting and events.