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Crypto Believers v. U.S. Regulators

Categories : Cash does not require a technology infrastructure, Cash generates security, Cash is the first step of financial inclusion
June 22, 2021
Tags : CBDC, Cryptocurrency, Privacy and anonymity, Regulation, United States
Crypto incumbents defend themselves from regulation and scrutiny, befriending and hiring former (and current) regulators and politicians. However, top U.S. regulators remain skeptical of cryptocurrencies.
Manuel A. Bautista-González

Columbia University in the City of New York

This post is also available in: Spanish

The Anti-Money Laundering Cup: Crypto Lobbyists 1 – U.S. Treasury 0

In July 2019, U.S. Treasury Secretary Steven Mnuchin said that cryptocurrencies could present a “national security issue” due to their use in illicit activities and that the Trump administration would not “allow digital asset service providers to operate in the shadows.” In February 2020, Munchin said during a public hearing that he wanted “to make sure cryptocurrencies aren’t used for the equivalent of old Swiss secret number banking.”

Mnuchin, however, capitulated as crypto lobbying delayed the adoption of a rule (announced on December 2020) that would curb money laundering with cryptocurrencies by requesting that platforms require customers’ and recipients’ information for transactions over US$3,000. Sigal Mandelker, the top U.S. Treasury in charge of financial crimes until 2019, objected to the Treasury rule after her departure: she is now an employee at Ribbit Capital, an investor in several crypto players.

In a comment letter to the rule, Jack Dorsey, CEO of Square, said that “because cryptocurrency transactions function similarly to cash or negotiable instruments, the recordkeeping requirement in the Proposal is unacceptable […] The incongruity between the treatment of cash and cryptocurrency […] will inhibit adoption of cryptocurrency and invade the privacy of individuals,” in a somewhat paradoxical statement by the also-CEO of Twitter, a surveillance-capitalistic firm par excellence.

Trump’s “Crypto Comptroller” of the Currency becomes CEO of Binance

In April 2021, crypto exchange Binance hired Brian Brooks as CEO, known as the “Crypto Comptroller” of the Trump administration. Brooks, an erstwhile chief legal counsel at Coinbase tapped to become acting Comptroller of the Currency (2020-2021), wrote interpretative letters which could make it easier for U.S. federal banks to handle and use digital assets and currencies soon.

Crypto firms’ hiring frenzy of former politicians and regulators is bipartisan: in March 2021, Max Baucus, a former Democratic U.S. Senator for Montana, became a consultant to Binance; and former deputy chief of staff (2009-2012) and campaign manager for President Obama (2012) Jim Messina joined the board of Blockchain.com.

“If It Quacks and Walks Like a Duck:” Crypto Exchange Ripple Lawyers Up (and Lobbies Up)

 In December 2020, the U.S. Securities and Exchange Commission (SEC) sued Ripple, a crypto exchange platform, accusing it of illegally selling US$1.38 billion worth of XRP, then the third most valuable cryptocurrency after Bitcoin and Ether. According to the SEC, XRP should be considered an “‘investment contract,’ and therefore a security” (Securities and Exchange Commission v. Ripple Labs, Inc. Bradley Garlinghouse, and Christian A. Larsen 2020: 2).

Regulators generally treat cryptocurrencies as commodities if they are released on decentralized networks. The crux of the XRP question is whether the SEC should consider tokens issued by individuals and companies as securities. In his 2018 course on “Blockchain and Money” at MIT, Gary Gensler (now the SEC chair of the Biden administration) said that regulators use a “duck test” to determine whether cryptocurrencies are commodities or securities: “if it quacks and walks like a duck, it’s probably a security.”

As a lecturer, Gensler said that there was “a strong case” that XRP was a security. Ripple asserts that as a virtual currency, XRP is outside the SEC jurisdiction. “We are not only on the right side of the law, but we will be on the right side of history… [T]he SEC is engaged in an all-out attack on the crypto industry,” said Ripple’s CEO, Brad Garlinghouse, not without hyperbole.

Capturing Ex-Regulators and Making them Crypto Advocates and Lobbyists

Grandiose and victimizing rhetoric is not Ripple’s primary strategy against the SEC. Instead, to defend itself, the company has hired Mary Jo White, former SEC chair during the Obama administration, a consulting firm, and two lobbying firms – one set up by a former Republican House member from Texas; the other led by an erstwhile Hillary Clinton aide.

Ripple is not alone in hiring former regulators as advocates and funding lobbyists. A week before its US$86 billion IPO in April 2021, Coinbase launched a new trade group, the Crypto Council for Innovation, with asset manager Fidelity, the payments company Square, and the investment firm Paradigm. Coinbase has spent more than US$700,000 on government lobbying since 2015.

The Council joins a long list of crypto groups, including the Coin Center, the Chamber of Digital Commerce (both founded in 2014), the Association for Digital Asset Markets, the Blockchain Association, and the Virtual Commodity Association (the three were founded in 2018). The board of advisors of the Chamber of Digital Commerce includes Paul Atkins, former SEC commissioner (2002-2008); Chris Giancarlo, former chair (2017-2019) of the U.S. Commodity Futures Trading Corporation (CFTC); Mark Wetjen, erstwhile commissioner of the CFTC (2011-2015); and Mick Mulvaney, former congressman, gold and bitcoin enthusiast, and acting chief of staff in the Trump administration (2019-2020).

In March 2021, former SEC chair (2017-2020) Jay Clayton and Kevin Hassett, former chair of the White House Council of Economic Advisers (2017-2019), joined the advisory council of One River Digital Asset Management, a hedge fund specializing in digital assets. In April 2021, Chris Giancarlo (already an advisor to the Chamber above mentioned) became a director of BlockFi, a firm bringing cryptocurrencies into traditional financial and wealth management solutions.

Crypto and Blockchain Believers in the U.S. Congress

Mick Mulvaney co-founded the Congressional Blockchain Caucus in 2016. The bipartisan Caucus advocating for a “hands-off regulatory approach, believing this technology will best evolve the same way the internet did; on its own.” In January 2020, caucus’ members introduced a bill to remove a U.S. tax requirement to report transactions of up to US$200 and to facilitate “the everyday use of virtual currency” in retail payments.

But U.S. Regulators Remain Skeptical of the Crypto Gospel

Crypto advocates launched the first salvo to the Biden administration in a March 2020 letter. In their wishlist of policy priorities, the Digital Chamber argued for a “light touch regulatory approach,” “strong statements in support of blockchain technology […] similar to the Clinton-Gore statement on allowing the Internet to flourish [without regulation],” and inclusion of blockchain technology pilot programs in the Biden infrastructure plan.

Whether the U.S. government should subsidise crypto developments is an open question susceptible to political debate. What is undeniable is the skepticism of U.S. regulators. Federal Reserve Chairman Jerome Powell has said that cryptocurrencies are” really vehicles for speculation. They’re not really being actively used as payments.”

Powell has said that “crypto assets are highly volatile – see bitcoin – and therefore not really useful as a store of value. They’re not backed by anything. They’re more of an asset for speculation. It is essentially a substitute for gold rather than for the dollar,” echoing what other technocrats such as Mark Carney, Bank of England governor, have long said. Like many other central banks, the Federal Reserve has studied the feasibility of a central bank-issued digital currency.

Janet Yellen, the Treasury Secretary of the Biden administration, gave a harsh warning about bitcoin in February 2021. “I don’t think that Bitcoin — I’ve said this before — is widely used as a transaction mechanism. To the extent it’s used, I fear it’s often for illicit finance. […] It’s an extremely inefficient way of conducting transactions. And the amount of energy that’s consumed in processing those transactions is staggering. But it is a highly speculative asset, and I think people should beware. It can be extremely volatile, and I do worry about potential losses that investors in it could suffer,” said Yellen.

This post is also available in: Spanish

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