The cryptocurrency industry is going to Washington.
According to an article in the Wall Street Journal, crypto companies are spending big bucks to hire former regulators and government officials to increase their influence on policymaking. The revolving door between government agencies and private enterprise, at least in the case of cryptocurrencies, has gathered speed in recent times after a bull market in prices and new products introduced during the pandemic.
The Journal reports that more than 200 former staffers of federal agencies, Congressional offices, and national political campaigns are moving to cryptocurrency venture capital firms and startups. Jeff Hauser, Executive Director of the Revolving Door Project – a non-profit, said that lobbying activity and political spending by cryptocurrency firms has ‘surged’ alongside recruitment of government firms.
The list of people moving from government to crypto is a long one and includes several high-ranking officials.
Former SEC chief Mary Jo White, who is defending Ripple Inc. against charges of an unregistered sale of securities, is among those who have crossed the divide. Former Treasury Secretary Larry Summers is now on the board of Block Inc., formerly known as Square. Brian Brooks worked briefly as Comptroller of Currency before a short stint as CEO of Binance. He recently testified during a Senate hearing as CEO of Bitfury Group and is also on the board of Protego Trust, a cryptocurrency custody service.
Jay Clayton was widely disliked by the crypto community for cracking down on initial coin offerings and categorizing cryptocurrencies as securities during his tenure as SEC chief. His career after the SEC stint, however, includes an advisory role with One River Asset Management – a crypto funds firm. CFTC chief Christopher Giancarlo was christened ‘Crypto Dad’ after he came out in support of the asset class during Senate hearings. That support translated to a lucrative gig after CTFC when he first became a board member at BlockFi and, subsequently, became a champion of cryptocurrencies at Willkie Farr & Gallagher Inc., a New York – based law firm. There is a good chance that current SEC chief Gary Gensler, who taught cryptocurrencies and blockchain at MIT before taking over his current duties, might also join the industry after his stint.
Moving Towards Regulation
It has been a journey of more than a decade towards regulation for cryptocurrencies. The Journal says that two factors hastened that push in recent times.
The first one is crypto tax provisions from the IRS in last year’s bipartisan infrastructure package. Those provisions expanded were a signal that the government agency was taking the asset class seriously. The second factor was the election of a new government. The Trump administration boasted officials like Anthony Scaramucci, who owns a crypto advisory firm, and Brian Brooks, who came in after a stint at North America’s biggest cryptocurrency exchange, Coinbase. This administration, on the other hand, is filled with crypto skeptics who are keen to regulate the industry. Lucrative compensation packages in excess of seven figures are also a draw. As is the promise of future profits from tokens, that might appreciate in price in the future, given to senior executives at these firms.
The cryptocurrency industry’s focus on regulation comes at an interesting time. The Biden administration released an executive order last week asking government agencies to coordinate amongst themselves while designing rules for cryptocurrencies. While the order is not exactly groundbreaking in terms of its content, it does signal growing acceptance of crypto as part of the financial industry’s rubric. Its ecosystem is also growing bigger by the day, always an open invitation for regulators to step in. Nonfungible tokens (NFTs), which took off last year, are being likened to securities because they can be traded for profit.
For its part, the crypto industry is bankrolling the regulatory push with income earned from skyrocketing token valuations and crypto trading fees. Coinbase, a publicly listed cryptocurrency exchange, reported record revenues this past quarter and is planning to make 2022 an “investment year” during which it invests in moonshots. NFT marketplaces also raked in moolah. Investors and venture capital firms, enamored by buzzwords like Web3, are also pouring money into crypto and blockchain startups. Much of their funding is going towards buying regulatory approval. For example, BlockFi, a crypto services firm which has raised $508.7 million from investors, recently paid $100 million as penalty to the SEC for selling unregistered securities.
There is the case that former regulators could bring order and caution to the crypto Wild West. It will expand markets, making crypto available and understandable to law makers, and help establish limits to the asset class’s breathless ambitions. If nothing else, the current exodus of former officials towards crypto firms will tamp down the outrageous claims and unnecessary drama that is the cryptocurrency industry today. Over the years, the industry’s hyperbole – trustless! decentralized! economic freedom! – has become abstract and meaningless. It has milked each catastrophe and event to promote its credentials even though there is scant proof to back them.
While there is no doubt that cryptocurrencies are a vital part of our future, their understanding, at least for the common man and regulators, is still window-dressed in entrepreneur-speak and hypotheses about possible utility. A closer look from former regulators might help projects clarify their intent and help them define their utility to the public.