What is cryptocurrency lobbying?
As cryptocurrency and blockchain technologies continue to innovate and grow at a rapid rate, the crypto industry has increased its cryptocurrency lobbying presences and are taking to Capitol Hill in attempts to educate Congress on the positives that blockchain technology and cryptocurrency can bring to the financial ecosystem as well as other U.S. industries like business, government, law enforcement, and healthcare. Lobbyists are also hoping to disassociate cryptocurrency from its reputation as a digital currency used for criminal activity. With the new Biden administration and bipartisan support, industry lobbyists are looking to guide new legislation in favor of innovative growth, ethical market conduct, and regulatory and taxation clarity.
Cryptocurrency lobbyist groups have expanded over the past few years. Cryptocurrency lobbying groups are not only comprised of crypto industry companies, projects, and exchanges, but lobbying groups have financial institutions, law firms, startups, investment firms, software companies, and IT consultant agencies as members.
Why are cryptocurrency lobbyists lobbying?
There are some key factors as to why cryptocurrency lobbyists are lobbying. One of the main reasons is the lack of clarity around cryptocurrency regulations. It is no secret the Securities and Exchange Commission’s (SEC) lawsuit against Ripple Labs sent shockwaves through the FinTech industry as the SEC claimed Ripple Labs “raised over $1.3. billion through an unregistered, ongoing asset securities offering.” As a result, Ripple’s XRP token was delisted from exchanges and XRP investors lost billions of dollars. Understandably, the cryptocurrency industry is lobbying for clear, objective, standardized guidelines on whether different types of cryptocurrencies are classified as a commodity or a security. Cryptocurrency companies want regulatory clarity so that they can stay in compliance with securities laws and not face the same fate as Ripple Labs.
Along those same lines of regulatory clarity, lobbyists are also pursuing clarity from the Internal Revenue Service (IRS) on how different types of cryptocurrencies are taxed, as well as an understanding of how the Financial Action Task Force (FATF) plans to implement surveillance on crypto used for money laundering and illegal activity.
Cryptocurrency lobbyists are also interested in educating policymakers and the public about the benefits of cryptocurrency and blockchain technology and its potential for future technology innovations; squelching the misplaced fears about the use of cryptocurrency in criminal activity; and proving their belief that crypto will encourage economic growth, foster financial equity, and be the future of democratized currency.
Industry lobbyists see a mainstream financial future in cryptocurrency and the sooner the government creates clearer guidelines and supports the industry, the sooner there will be mass adoption.
Challenges to Cryptocurrency Lobbyists
As cryptocurrency lobbyists address Capitol Hill they have been met with a growing number of challenges. Educating policymakers on blockchain technology and the potential of cryptocurrencies, and assuaging fears about crypto are the biggest hurdles crypto lobbyists are facing today. Below describes some of the issues crypto lobbyists are actively addressing.
The great debate around cryptocurrency is whether cryptocurrency is classified as a security or a commodity. For a cryptocurrency to be considered a security it must pass the Howey Test. The Howey Test consists of four criteria, (1) the investment of money (2) in a common enterprise (3) with reasonable expectation of profits (4) derived from the effort of others. Should the cryptocurrency pass the test then it is considered a security token and is subject to SEC regulations under the Securities Act of 1933 and the Securities Exchange Act of 1934. As of May 2021 in an interview with CNBC, the SEC Chairman, Gary Gensler, has claimed investors do indeed need more protections in crypto markets and has said that “…a lot of crypto tokens—I won’t call them cryptocurrencies for this moment—are indeed securities.” Yet, the SEC is still slow to define what those tokens might be. The SEC tends to take action only on specific cryptocurrencies and transactions when they believe regulations apply. There is no set regulation on the crypto market across the board. Crypto lobbyists have had their work cut out for them requesting that these government regulations on crypto be more defined.
In the cryptocurrency market the price of digital assets is volatile, meaning the value of cryptocurrencies fluctuate on a daily basis and sometimes drastically. Crypto experiences aggressive volatility due to many factors like media coverage, crypto influencers (e.g., Elon Musk), supply and demand (e.g., there are 21 million Bitcoin that will ever be in circulation), lack of control in a decentralized market (no support to subdue extreme volatility like there is in a centralized marketplace), amateur investors, slow adoption rates, foreign policy (e.g., China’s ban on Bitcoin mining), and the uncertainty in the future value of Bitcoin, among other factors. Should cryptocurrency transition to a mainstream form of currency the nature of its volatility is not favorable. Currency has two elements—it must store value and act as a tender for exchange, however, crypto’s volatility undercuts both of these elements. And thus, policymakers find such volatility with no safety net to back the crypto market quite worrisome.
Reporting and recordkeeping requirements.
The Anti-Money Laundering Act of 2020 and the Corporate Transparency Act under the Senate-approved National Defense Authorization Act, and the broadening of the Bank Secrecy Act (BSA), has expanded the Financial Crimes Enforcement Network (FinCen) surveillance over digital currency transactions. Proposed regulations include small companies disclosing crypto ownership data, whistleblower incentives, and reporting on “unhosted wallets” in transactions over $3,000, among other guidelines. Such surveillance is concerning to lobbyists as it could be indicative of inhibiting further blockchain and crypto technology innovations.
High-profile hacking and ransomware attacks.
Since as early as 2010 there have been concerns with hackers and ransomware attacks. From 2010 to 2014, Mt. Gox, the Tokyo-based cryptocurrency exchange, claimed to be responsible for over 70% of Bitcoin transactions at one point in time. This high volume in transactions caught the attention of hackers who used stolen credentials to steal thousands of Bitcoins. This combined with technical bugs and glitches in the system and customers withdrawing funds ultimately led Mt. Gox to suspend withdraws, claim a loss of 850,000 Bitcoin (6% of all Bitcoin circulation at the time), and a drop in Bitcoin price by 20% in the market. Mt. Gox filed for bankruptcy and investors lost a lot of money. Additionally, as of recently, JBS (the world’s largest meat processor) and Colonial Pipeline were hacked. Hackers demanded $11 million Bitcoin from JBS and nearly $5 million in cryptocurrency from Colonial Pipeline in these ransomware attacks. These high-profile hacking and ransomware attacks are different from attacks in the past that required bank accounts and fiat currency. Ransomware attacks have changed. Hackers now demand cryptocurrency rather fiat because a payment can be made in seconds across national boundaries and is nearly untraceable. While the blockchain that enables Bitcoin is a public ledge for anyone to view, the Bitcoin transactions made on the blockchain are seemingly anonymous with a set of random numbers assigned to digital wallets and there is not necessarily a way to know who is associated with those wallets. This makes it possible for cyber thieves around the world to extort ransoms on a huge scale and use that cryptocurrency for further illicit activity like money laundering and drug trafficking. Obviously, lawmakers find this system of anonymity unsettling in the way it can be used to exploit U.S. businesses. The crypto industry agrees that using crypto to exploit U.S. businesses is unsettling and crypto lobbyists have acknowledged that ransomware is the most concerning issue when it comes to crypto and criminal activity.
Fear that cryptocurrency is used for illegal means.
The Secretary of Treasury, Janet Yellen, has stated she believes cryptocurrency is used “mainly for illicit financing.” It is true, cryptocurrencies can be used for fraud and manipulation, however, in a recent report from Chainanalysis, trends are indicating that cryptocurrency-related crime is dropping. Chainanlysis reports, “In 2019, criminal activity represented 2.1% of all cryptocurrency transaction volume, or roughly $21.4 billion worth of transfers. In 2020, the criminal share of all cryptocurrency activity fell to just 0.34%, or $10.0 billion in transaction volume.” As lawmakers have understandable concerns about cryptocurrency’s criminal activity potential, crypto lobbyists have data proof points to show some of those fears and concerns are overexaggerated. In fact, a recent study from Beacon Global Strategies has cited that blockchain technologies can aid in identifying and deterring illicit activity. Beacon Global Strategies stated, “The blockchain ledger on which Bitcoin transactions are recorded is an underutilized forensic tool that can be used more widely by law enforcement and the intelligence community to identify and disrupt illicit activities. Put simply, blockchain analysis is a highly effective crime fighting and intelligence gathering tool.” Lobbyists have had their work cut out for them in tackling the crypto-funded criminal activity sensationalism that generates crypto fear. Instead of feeding into that fear, lobbyists are having to show to policymakers the relatively low volume of cryptocurrency-related crime and the benefits to crypto and blockchain technologies.
Lack of knowledge.
Simply put, blockchain technology and cryptocurrency is confusing. Many regulators and policymakers are merely ignorant to this type of technology. An issue crypto lobbyists have to address is how to educate officials on the technology behind blockchain and cryptocurrency. Lobbyists need to demystify the tech and show how blockchain technologies and cryptocurrencies can bring greater value to other parts of business.
Environmentalists have become concerned about the energy used to mine cryptocurrency, which may cause increased carbon emissions, as well as an increase in the amount of e-waste generated from mining. In a recent study from Cambridge University, it was found that Bitcoin mining consumes more energy annually than the entire country of Argentina. This is due to the constant verification of crypto transactions by a network of computers, also known as mining, which uses coal and other fossil fuels as a major source of electricity to power those mining computers. A reduction in energy consumption doesn’t appear to be going away any time soon as environmentalists have noted that as the price of Bitcoin increases, the mathematical formulas to create blocks will become more difficult and thus increase energy usage, which means it will take more energy to process the same number of transactions in the future. Additionally, there are specific types of computers and other hardware used to mine cryptocurrency, which have a lifespan of only one and half years. Digiconomist has reported that Bitcoin networks have generated 8,000-12,0000 tons of electronic waste each year. As cryptocurrency and blockchain technologies continue to evolve, environmental impacts will continue to be a serious issue for crypto lobbyists and the industry to address.
Crypto lobbyists are not only seeking to preserve and expand the innovative spirit of blockchain technologies with U.S. government partnerships, but they are also seeking to keep the U.S. on the competitive edge of a digital financial system. Currently, countries in the European Union, Singapore, Switzerland, Japan, and China have begun to adopt digital currency and are looking to dominate the digital financial ecosystem. Comparatively, the U.S. is behind. Some crypto lobbyists believe that without a willingness from lawmakers to get on board then the U.S. Dollar and national security could be in jeopardy.
Cryptocurrency is not truly a democratized currency as it claims to be.
According Quartz, as of 2019 over 50% of Americans owned stock and those who own stock have a retirement investment with the financial means to own that stock, while those who don’t are mostly, “low-income Americans who lack access to a retirement account or can’t afford to contribute. Ninety-two percent of working, non-stock owning Americans don’t participate in a 401 (k)-type plan, while 72% of stock owners contribute to a retirement account. The stock owners also earn much more: Their medium income is $90,000, compared to just $45,000 among Americans who don’t own stock.” The financial inequity in this instance is large, but crypto claims to be a democratized currency allowing anyone the opportunity to invest and own crypto, and thus closing that gap. Through blockchain technology, the middleman (i.e., banks, brokerage firm) is eliminated and anyone with internet access can purchase just a small portion of crypto and become an investor with the potential to see their digital assets grow. But it is questionable as to who exactly does participate in crypto investments. As seasoned and novice investors continue venture into the crypto space it’ll be interesting to see how crypto could alter financial inequity and how government will respond.
Key Cryptocurrency Lobbying Groups
Cryptocurrency lobbying groups are increasing in numbers and growing in memberships. Below is a list of key cryptocurrency lobbying groups as of August 2021.
Notable Bills Regarding Cryptocurrency
Since 2019 there have a been a number of notable bills introduced to the Senate and House of Representatives in regard to cryptocurrency and blockchain technologies.
- Digital Taxonomy Act of 2019 – “This bill requires the Federal Trade Commission to develop a plan for preventing unfair or deceptive practices relating to transactions involving digital tokens, including any recommendations for further action by Congress. Digital tokens include digital currency or cryptocurrency.”
- Token Taxonomy Act of 2019 – “To amend the Securities Act of 1933 and the Securities Exchange Act of 1934 to exclude digital tokens from the definition of a security, to direct the Securities and Exchange Commission to enact certain regulatory changes regarding digital units secured through public key cryptography, to adjust taxation of virtual currencies held in individual retirement accounts, to create a tax exemption for exchanges of one virtual currency for another, to create a de minimis exemption from taxation for gains realized from the sale or exchange of virtual currency for other than cash, and for other purposes.”
- Keep Big Tech Out of Finance Act – “This bill generally prohibits certain large technology companies (e.g., social media platforms) from offering financial services. Specifically, these companies may not be a financial institution; be affiliated with a financial institution; or establish, maintain, or operate a digital currency. The bill provides for a one-year wind-down period for a company engaging in these prohibited activities.”
- Crypto-Currency Act of 2020 – “This bill establishes agency oversight of certain digital assets and requires these agencies to publish (1) the exchanges trading these assets, and (2) the requirements to create or trade these assets. The bill generally defines these assets as using a decentralized digital distributed ledger (e.g., blockchain) for transactions. The bill establishes the Commodity Futures Trading Commission as the primary regulator of cryptocommodities. The bill also establishes the Financial Crimes Enforcement Network and the Office of the Comptroller of the Currency as the primary regulators of cryptocurrencies. Finally, the bill establishes the Securities and Exchange Commission as the primary regulator of cryptosecurities and synthetic stablecoins.”
- Stablecoin Classification and Regulation Act of 2020 – “This bill provides for the regulation of stablecoins, a type of privately issued digital currency whose value is pegged to a currency such as the U.S. dollar. Issuers of stablecoins must be a member of the Federal Reserve System, and must seek prior approval from the Federal Reserve, the Federal Deposit Insurance Corporation, and the appropriate banking agency for the offering of stablecoins. Issuers of stablecoins are subject to oversight by the appropriate banking agency, including with respect to capital adequacy, leverage, and permitted activities. Furthermore, issuers of stablecoins must be able to redeem all outstanding stablecoins at their nominal redemption value in U.S. dollars upon demand.”
- Blockchain Promotion Act of 2021 – “This bill directs the Department of Commerce to establish the Blockchain Working Group to submit a report to Congress that contains a recommended definition of the distributed ledger technology commonly referred to as blockchain technology and other specified recommendations regarding this technology.”
Legal Guidance and Cryptocurrency Lobbying
Policymakers are considering and drafting cryptocurrency legislation in real-time (in 2021 alone cryptocurrency legislation has been introduced to 31 states). Cryptocurrency lobbyists are racing to educate and influence these governing bodies that cryptocurrency is a viable option as a currency for mass adoption. As lobbyist address lawmakers it is important to have legal guidance on issues concerning cryptocurrency and blockchain technologies from a range of aspects concerning SEC compliance to crypto business tax to interpreting existing regulations. Legal counsel is also advisable when proposing and opposing legislation.