The White House delivered a series of reports this week on the administration’s intentions to regulate the industry, backed by an executive order. While encouraging innovation, including the potential development of a Federal Reserve-backed “digital dollar,” the reports urge regulators such as the Securities and Exchange Commission and the Commodity Futures Trading Commission to “aggressively pursue investigations and enforcement actions,” according to the White House.
The reports come after the White House issued a stinging statement earlier this month about the climatic effect of crypto mining, which utilizes vast amounts of electricity to execute transactions, largely for Bitcoin. It seems to be another watershed moment for crypto companies and investors. And, as with everything in crypto, the regulatory effort is creating further debate and concern about whether Washington will be able to develop laws without breaking the industry’s back.
Despite its anti-government origins, the industry seeks regulation on its own terms. A legal framework for tokens and trading platforms, it is hoped, would attract more mainstream consumers as well as institutional capital pools like as pension funds.
Given recent scandals, the industry must also rebuild its trust. The bankruptcy of prominent crypto enterprises including as Celsius Network, Voyager Digital, and Three Arrows Capital contributed to the loss of $2 trillion in the token market, diminishing crypto’s attraction to institutional investors and increasing pressure on politicians to enact consumer safeguards.
The political will to control crypto is certainly growing. Along with the White House initiative, bipartisan legislation in Congress might resolve long-standing difficulties such as whether tokens qualify as securities and which agencies should be in charge of oversight.
Rules for exchanges like Coinbase, investment businesses like Grayscale Investments, and miners like Riot Blockchain (RIOT) and Marathon Digital Holdings are all at risk (MARA). Token issuers and companies supporting decentralized financial networks are concerned that they may face more scrutiny from agencies tasked with carrying out the president’s commands.
At the same time, detractors of cryptocurrency regard the regulatory movement as a sham. Some consumer groups see the White House efforts as a way for crypto to strengthen its links to the banking system. And they are concerned that further regulation would just increase the attraction to regular investors, allowing more investors to lose money in tokens and crypto-related companies.
Now, you can have a collapse in which billions of dollars evaporate in months with no systemic consequences. This is improbable if the industry is linked to the heart of the banking and financial system.”
The White House report on crypto highlights the administration’s challenges. Mining activities, which operate computers 24 hours a day, use up to 1.7% of US electricity, while crypto activity overall emits up to 0.8% of US-based greenhouse-gas emissions into the environment, according to the paper. None of this is consistent with the administration’s stated objective of reducing emissions by up to 52% by 2030.
So, what should be done? The White House proposed a number of initiatives that the EPA and Energy Department may take. The most severe would outlaw proof-of-work mining, which is used by the Bitcoin network. Other prominent blockchains, like as Ethereum, have transitioned to less energy-intensive technologies, leaving Bitcoin as an exception.
A mining prohibition, on the other hand, is the least conceivable answer; mining would just relocate to other nations. And the industry has already threatened legal action in response to a possible ban. If the White House ever tries to outlaw Bitcoin mining, they may find themselves in hot water.
That is just one aspect of the administration’s difficulties. The reports released on Friday addressed crypto’s hazards to consumers, financial stability, and the measures used by the government to fight illegal money. One study even suggested that the Department of Labor examine the fiduciary behavior of 401(k)-plan sponsors that offer crypto as an investment, a jab at Fidelity Investments, which wants to sell Bitcoin in retirement plans it administers. According to Fidelity, their crypto offering is “a responsible way to fulfill the expectations of mainstream interest.”
Regulation is increasingly seen as a need by many crypto companies. Crypto arose among libertarians who were opposed to government intrusion; many argued that blockchain technology was impervious to “censorship” and other types of control. However, the bulk of its funding is now coming from venture capital and banks who think regulation would boost crypto prices. Given the $1 trillion token market and economic interests in crypto from Wall Street to Silicon Valley, oversight is unavoidable.
The industry has assembled a formidable lobbying apparatus and is pouring money into pro-crypto politicians. This Monday, the Blockchain Association, a trade organization, announced the formation of a new political action committee. Coinbase CEO Brian Armstrong also said this week that the business has incorporated “crypto policy initiatives directly into our app,” including crypto-friendliness scores for politicians. FTX creator Sam Bankman-Fried recently said that he may spend $1 billion on the 2024 election, despite the fact that his political interests extend beyond crypto.
Congress, according to the industry, is the key to obtaining favorable regulations. This is due, in part, to the fact that a law will almost certainly be required to resolve probably the most controversial issue: which tokens should be subject to SEC oversight.
In a Senate Banking hearing Thursday, SEC Chair Gary Gensler, who has filed many enforcement proceedings against crypto companies, said that the “vast majority” of tokens are securities under the agency’s authority and that exchanges should be registered.
However, placing the SEC in control of crypto is far from certain. The Senate Agriculture Committee is studying bill that would place the bulk of crypto under the jurisdiction of the CFTC, which the industry regards as a light regulator. Crypto supporters urged the committee this week to include measures in the law that would designate most cryptocurrencies as commodities, removing most of the SEC’s enforcement and rule-making authority.
With the midterm elections in November approaching, the bill has little time to become law this year. While regulatory concerns grow, investors in crypto equities have more urgent concerns. Bitcoin is now trading slightly below $20,000, having fallen 72% from its November peak. Mining companies may be more concerned with keeping afloat in the midst of a protracted crypto winter that has wiped out revenues and placed several miners on the verge of collapse. Exchanges are also suffering. This year, Coinbase stock has fallen by 70%.
For the time being, the industry may just be expecting to survive through this crisis while urging Congress to shield it from the White House’s regulatory onslaught.