Crypto clearly is going mainstream. The drama of the recent bust cycle in the recurring boom-and-bust in crypto prices provided a dramatic backdrop to the introduction of the Lummis-Gillibrand Responsible Financial Innovation Act, laying out a comprehensive regulatory framework for cryptocurrency.
Its introduction received extensive fanfare in the media.
Adelle Nazarian is the CEO of the American Blockchain PAC, which protects innovation in blockchain and digital assets in the U.S. and opposes legislation that limits the growth of crypto assets.
Todd August White is Managing Partner of Rulon & White Governance Strategies and the founder of the American Blockchain PAC.
Don’t worry, this column won’t go too deep into the weeds. For specifics, see the official section by section overview and commentary by Sen. Kirsten Gillibrand (D-N.Y.) at Medium.
At the risk of being slightly impolitic, this legislation signals the mainstreaming of crypto. But it won’t be enacted this year.
Virtually all political junkies believe that the congressional deck is going to be thoroughly shuffled this coming November. Therefore, the bill’s longer-term prospects are also in question.
Additionally, this legislation – while technically bipartisan – was introduced with just two sponsors. Neither dominates even one of the four committees of jurisdiction (agriculture, on which Sen. Gillibrand serves; banking, on which Sen. Cynthia Lummis (R-Wyo.) serves; intelligence; and finance) which it will have to navigate to get to the floor.
Much less, there is no sign of its commanding a 60-vote majority to carry it over the formidable filibuster hurdle. Even gaining a simple majority is no mulligan. The left is already saying that it does not regulate hard enough. The Center for American Progress critiqued it as, “The status quo would be better than this bill.”
Meanwhile, most Republicans will likely see it as regulating too much. Even if Senate passage is secured, Republican House passage and a Biden signature are not to be taken for granted.
The cryptoscenti are grateful for finally having something bipartisan with which to work. Many advocacy groups wish to stay in the sponsors’ good graces. Thus, most crypto advocates are too political to inventory the many hurdles. That said, let’s code switch here.
This legislation does represent an authentic rite of passage: Ms. Crypto goes to Washington!
In theory, a great leap forward for cryptocurrency! That said, as America’s greatest yogi, Yogi Berra, taught us, “In theory there is no difference between theory and practice but in practice there is.”
There are a lot of crucial details to be dealt with, in practice.
Let’s celebrate how the legislation’s debut included a marquee appearance by both Senate sponsors at Washington Post Live's “The Evolution of Money: Cryptocurrency Regulation.” That policypalooza also featured the Rostin Behnam, chair of the Commodity Futures Trading Commission (CFTC); Dante Disparte, chief strategy officer and head of global policy at Circle; and Tomicah Tillemann, global chief policy officer at Haun Ventures.
Disparte and Tillemann nicely summed up the general consensus in the room and in the media: The bill is unlikely to be enacted in the 117th Congress. Yet, they legitimately applauded it as a first step toward a comprehensive regulatory structure to protect the public without stifling the sector.
With a great deal of important matters still to be ironed out.
How great a deal? As capitalism’s inventor, Adam Smith, responded after the surrender of British Gen. Burgoyne at Saratoga, the turning point in the American Revolution, “There’s a great deal of ruin in a nation.”
The foundational premise of Lummis-Gillibrand seems to be to sort blockchain assets into two categories. The largest, bitcoin (BTC) and ether (ETH), are to be treated as virtual commodities, regulated by the CFTC. Parallel to that, are thousands – the vast majority, of smaller cryptocurrencies – to be sorted out pursuant to a codified “Howey Test” and, mostly, treated as securities to be regulated by the Securities and Exchange Commission (SEC).
The Senators were emphatic about how extensively they consulted with the SEC and the CFTC in drafting the legislation. What is unclear is how the associated compliance costs, which can easily be prohibitive to early-stage startups, were quantified or are to be constrained.
Chair Gary Gensler’s SEC has taken an aggressive regulatory posture. It does not have a history as an easygoing regulator. The proposed legislation also would take the U.S. out of the algorithmic stablecoin race forever. This, presumably, is in reaction to Terra's $40 billion LUNA debacle.
Yet, it overlooks the success (to date) of Frax.finance. Is there a baby being thrown out with the bathwater?
The biggest handicap which Lummis-Gillibrand appears to face (assuming a regulation-skeptical Republican resurgence) is less in its details, however significant, but more so in its fundamentally regulatory-heavy posture.
The Big Reveals at the presentation were of the senators’ greater coziness with the regulators than with the innovators. These were presented in impromptu statements by Sens. Lummis and Gillibrand at The Post event.
Most concerning was an unscripted comment by Sen. Gillibrand calling not only for prospective regulation of Web3 (the category into which crypto presumably falls) but a push for retroactive regulation of the web itself (especially Web 2.0, presumably meaning social media). Sen. Gillibrand in her own words:
"If we get Web3 right, we can then maybe go back and look at Web 2.0 and say what would a data protection agency look like, to begin to look at that.”
Despite its flaws, the worldwide web, including social media, has proven one of the great technology success stories in history; a multitrillion-dollar contribution to the U.S. economy and to America’s dominance of the commanding heights of tech.
Sen. Gillibrand thus casually revealed an extreme regulatory agenda: a promise to extensively regulate the web, Web3 and retroactively Web 2.0. This is unlikely to climb the wall of attracting 10 Republicans to afford passage through the Senate.
Big Reg will probably run into headwinds from a House that will likely be controlled by anti-regulation Republicans after the 2022 midterms. This does not bode well for prospects of passage.
As for the Bitcoin-friendly (but not so much crypto-friendly) and somewhat more conservative Sen. Lummis, her own admissions at the debut of her signature crypto legislation give pause. Washington Post reporter Tory Newmyer asked about the major entry of crypto into the lobbying and advocacy process in the capital, noting the $5 million the industry had invested in the former.
“How is that making a difference on the Hill?” Newmyer asked.
To which Sen. Lummis replied:
“Oh, I don't know because I had no idea that was happening …”
The co-sponsor of an ambitious piece of comprehensive legislation candidly confesses that she was unaware of the industry’s engagement. By their own frank admission, the Senate co-sponsors spent a great deal more time talking to the federal regulators than to the regulated. That does not bode well for the prospects of passage.
To paraphrase French Gen. Bosquet's comment on the Charge of the Light Brigade: “C’est magnifique, mais c’est pas les politiques, c’est de la folie.”
Bitcoin has not decoupled
And when asked why bitcoin (of which Sen. Lummis is a HODLer) has not seen its price act as a hedge against inflation, losing more than half its dollar value while inflation approaches double digits, Sen. Lummis responded: “Well, that's a great question. I would have expected it to decouple from the stock market. It has not done that.”
The co-sponsor of an ambitious piece of comprehensive legislation candidly confesses that the market is not supporting a fundamental predicate of her proposed regulatory structure?
That does not bode well for the prospects of passage.
Economist Friedrich Hayek devoted his Nobel Prize in economics acceptance speech to an indictment of what he called “scientism,” in which the economics profession adopted the form, but not the substance, of science. Hayek: “It is often difficult enough for the expert, and certainly in many instances impossible for the layman, to distinguish between legitimate and illegitimate claims advanced in the name of science.”
Classical liberals – like those of us here at the American Blockchain PAC – enthusiastically embrace the essential role of the rule of law. It’s libertarian doctrine!
That said, we are far more optimistic about the power of organic market forces, under the rule of law, to facilitate equitable prosperity while protecting the public from force, fraud or coercion than we are about ambitious regulatory structures. Especially regulatory structures that have gone off the rails even before the train has left the legislative station.
In the words of the chairman of our advisory board, blockchain inventor Dr. W. Scott Stornetta, “Let freedom ring!”
Tipping our hat to Jimmy Stewart, we applaud the debut of “Ms. Crypto Goes to Washington,” produced and directed by Cynthia Lummis and Kristen Gillibrand. Brava!
Next let’s take to heart the words of its protagonist, Sen. Jefferson Smith:
“Get up there with the lady that’s up on top of this Capitol dome, that lady that stands for liberty.”
Lummis-Gillibrand signals the mainstreaming of crypto. It is historic.
Now, let’s just invite in Lady Freedom – “the lady that’s up on top of this Capitol dome” – to achieve blockbuster status.