AUSTIN, Texas — The headlining takeaway of Consensus 2023, along with most crypto conversations being had these days, is that regulation of the space is one of the industry’s single largest issues.
In a poll made during the conference, almost 90% felt regulation is the most pressing issue facing crypto in the U.S. This issue is perceived as reduced outside of the U.S., with around 35% of respondents seeing crypto’s public image as an issue almost equal to regulation.
This year U.S. regulators, perhaps burned by instances of fraud in 2022, have gone into enforcement mode, much to the dismay of many.
Despite SEC Chair Gary Gensler’s, claims that crypto already has clear guidelines, the resounding response of the industry begs to differ. With every Wells notice and settlement, the parameters become ever more blurry, with regulators reportedly reluctant to enter into dialogue.
“The very first contact we had with them whatsoever was when they issued us this so-called Wells Notice,” said Oliver Linch, CEO of Bittrex Global. “That normally comes at the end of a long dialogue. The very first time we heard from them was when they sent us the Wells notice.”
The exchange has recently been in the eye of its own storm with U.S. regulators, being issued a joint Wells notice with its U.S.-focused entity, despite being referred to as a “foreign affiliate.”
“We asked for a reasonable amount of time to respond, and they basically said, No, we’re not interested in what you have to say,” he continued. “It’s not what you expect from anyone, let alone the legalistic U.S. government. It’s just not how you expect them to behave.”
However, not all in the “legalistic U.S. government” agree. In Gensler’s Congressional hearing, Representative Patrick McHenry said, “Regulation by enforcement is not sufficient nor sustainable,” one of many to criticize Gensler’s approach.
So the question turns to where the industry can go from here, and is there still time to undo the damage?
Navigating a possible Operation Chokepoint 2.0
In a panel discussion with McHenry and Sen. Cynthia Lummis, the next steps for regulation were front of mind.
“Within the financial sector, there’s been a lot of turmoil in traditional and digital assets. So that’s created a little bit of reticence around this subject for lawmakers,” said Lummis. “But for me, it creates the case for why we need responsible, understandable regulation of digital assets.”
She explained that the dynamics going into crypto legislation come from a desire to factor in consumer protection, the market structures, and how the companies currently operate in the space. As well as this, the White House’s economic document questioning the use cases for digital assets had thrown more doubt into the mix.
“We can tell lawmakers (of the use cases), but unless we can turn to specific examples, it’s not resonating with people. It’s falling on deaf ears,” she said. “Furthermore, you’re innovating so fast that policymakers can’t keep up. And we need to know what effects our legislative framework will have on your ability to continue to innovate here in the United States.”
However, the moves made by regulators in recent months have given an air of a so-called “Operation Chokepoint 2.0” where the industry is stonewalled out of existence.
“I think it’s fair to call it Operation Chokepoint 2.0,” said McHenry. “Because this is the same actions that the Obama administration attempted to take its state base regulated entities to bank them and remove them from the payment system.”
In the wake of FTX’s failure, he said that for crypto, regulators had turned from actively engaging with crypto-focused entities to direct opposition.
“They want to make things less certain. So you don’t have a legitimate capital allocated to a new technology set that some don’t want to see deployed.”
Coordination of Congress
Despite resistance to the industry, McHenry assured he was working on formulating legislation within the next 12 months.
“The odds of anything happening in Congress are low,” he said. “It’s always a challenge to legislate something new into existence, and to legislate complicated policy and to build up members understanding about the trade-offs necessary to make sound policy. So we’ve got serious work to do, but it is on the agenda in the house.”
He explained that as chair, the third part of his agenda focused on giving the digital asset market structure and definition and focusing on a stablecoin regime.
“I’ve got a lot of runway to report out and have legislation that we can pass out of the house on market structure and payments. So I intend to do this and get this out of the house,” he said.
The key to legislation eventually passing is the coordination of the House and the Senate.
“If the house moves first, and if Congressman McHenry and his colleagues are successful in getting something over to my side of the Capitol building, it improves our chances of moving something for it,” said Lummis.
While both were positive, the U.S. remains at a disadvantage, which McHenry highlighted during the panel.
Already, the EU has passed a comprehensive law to tackle the nuances of digital assets. While many agree MiCA is only a first step, a positive view has been shed on the market as an area ripe for innovation. Other jurisdictions have also established attractive regulatory regimes for digital assets, which many are concerned will drain innovation from the U.S.
“This seems to me much more of a dislike of technology at its core, which seems a very 16th-century notion,” said McHenry. “Technological progress is always happening. We are either embracing it and building it into our society or going back to the Dark Ages… So we want to encourage that we want to embrace it. We want to be the leaders.”