America is nearing the first anniversary of Joe Biden’s presidency in 2022. The tenure had an ambitious start. However, the last few months saw some serious turmoil around the economy’s health, the handling of COVID-19 by the administration, and the heated debate about Biden’s opus magnum, the $1.7 trillion Build Back Better legislation plan.
Although the Democrats may not be able to retain undivided power following the 2022 midterm elections, their prevailing view on crypto is stronger than ever. For at least three years, the incumbent president’s party will set the tone for regulatory discussions. Therefore, it is important to examine the basic premises and possible directions of its emerging crypto stance.
The narrative arc
An anecdote that features two statements by a Clinton about crypto-related matters perfectly captures the path mainstream Democrat thinking has taken over the past three years. The 42nd U.S. President, Bill Clinton (then 72), said at Ripple’s Swell Conference, October 2018, that there were many “permutations” and “possibilities” of blockchain.
Three years later, Bill’s ex-presidential candidate Hillary Clinton spoke at the Bloomberg New Economy Forum, Singapore. She called cryptocurrencies “interesting”, but warned that they could undermine the U.S. Dollar and destabilize countries.
This striking difference in opinions within the power couple is a reflection of the recent evolution of Democratic party itself — from a “third-way” business, tech, and finance-friendly centrrism of its 1990’s generations to the newfound statism that places a heavy emphasis upon redistributional justice, big government projects, and a strong emphasis on finance. The former first lady seemed more balanced than Senator Elizabeth Warren, her party comrade, which has been known for slamming the crypto market in the wake of the volatility eruption in September.
Advocates claim that crypto markets are all about financial inclusion. However, those most economically vulnerable will be the ones most likely to need to withdraw their funds the most quickly when the market falls. […] Crypto trading can be dangerous for those who don’t have a lot of money.
Warren criticized crypto many times, calling it “a fourth-rate alternative to real currencies” that is “unsuitable for exchange;” a poor investment; and a tool that facilitates many illegal activities.
Beyond Senator Warren
Senator Sherrod Brown is part of this negative sentiment, which is perhaps even more concerning given his position as chairman of U.S. Senate Committee on Banking, Housing, and Urban Affairs. Brown’s opening statements to Congress hearings were never friendly towards crypto. The introduction to the July hearing entitled “Cryptocurrencies, What are they good at?” summarizes their overall spirit.
These currencies all have one thing in common: they aren’t real dollars and they’ren’t backed by the whole faith and credit of America. […] This means that they all risk Americans’ hard-earned cash.
Brown blamed the “cottage sector of decentralized financial systems” for trying to create “a parallel system without rules, no oversight, or limits.” He called it “a shady network of online joke money,” and said it was not democratic or transparent. Last December, at a Congress hearing, Brown repeatedly denied that crypto could be an option to legacy money.
Stablecoins, crypto markets, and other forms of digital currency are not alternatives to the banking system. […] They are a mirror of our broken system, with less accountability and no rules.
However, it’s not all bad. Maxime Waters, who represents a moderate but not pragmatic approach to cryptocurrency, would play a significant role in any industry outcome. She is the Chairwoman of the House Committee on Financial Services and she established the Digital Assets Working Group of Democratic Members. This group was created to promote responsible innovation in cryptocurrency and digital assets and “meet leading regulators, advocates and other experts on how these new products and services are changing our financial system.”
Related: Lines In The Sand: US Congress brings partisan politics to crypto
Sen. Waters acknowledged publicly that “Americans are increasingly using digital assets every single day” and stated that her Committee would explore the “promise of digital assets in providing faster payment, instantaneous settlements, and lower transaction fees for sending remittances.”
What is it all about?
The good news is that there is a word: regulation. At this point it is clear that the U.S. cannot wage a total war against crypto in China’s style. The Democratic establishment clearly intends to settle the rules before the next presidential election, hence the fervent activity in Congress and federal agencies over the past months.
The President’s Working Group on Financial Markets was launched by the Biden administration. It is a super team that includes the FDIC, OCC and FTC executives. The secretary of Treasury Department leads the group.
The 26-page report by the Working Group on stablecoins is the main product. It advises Congress to make some stablecoin-related activities, such as clearing, settlement, payment and clearing, “systemically important” (which will inevitably result in tighter oversight) as well as limit stablecoin issuance for insured depository institutions, i.e. banks.
The core classification of digital assets is the problem, just as in the pre-Biden period. PWG’s report did not propose a new interpretation or give precedence for a single regulatory body. This perpetuated a situation in which a variety regulators monitor different types of crypto-related activities.
Rostin Behrnam, chairman of the Commodity Futures Trading Commission, and a member the Democratic Party, stated that up to 60% of digital assets could be classified as commodities. This amounts to suggesting that the agency should become the U.S. cryptocurrency regulator. Rostin Behnam stated that his agency would need a regulatory structure for commodities and securities, which would be a significant improvement on the current patchwork approach to regulation.
The Democratic cause
There are many reasons to believe that 2021’s largely proclamatory activities will be followed by real action the next year. First, the U.S. Democrats’ general idealistic outlook. This mindset includes, for example, the desire to aggressively regulate Big Tech.
While President Barack Obama and other regulators worked with Google and Twitter to promote the growth of internet companies, Joe Biden’s administration was elected amid widespread anxiety over cyberattacks and personal data leaks, Meta crisis management and the outsized influence tech goliaths have had on the political process.
Meta and Google have been fighting state and federal regulators in court over allegations of anticompetitive behavior for some time. Biden’s team pledged to hold tech companies accountable for harmful speech they host, and to strengthen anticompetitive practices policing.
We have not seen any major policy changes in this direction in 2021. The two main legislative proposals, Amy Klobuchar’s bill that would prohibit big tech platforms favoring their products and services and a House Democrats bill that would remove protections granted tech companies by Section 223 of the Communication Decency Act, have not been passed into law.
The second reason for the Democratic rush to include crypto within the regulatory framework is pragmatic. The Biden administration, along with its allies on Capitol Hill, need money. Biden’s first term agenda is heavily dependent on ambitious Roosveltian-style infrastructure projects. The $1.2 trillion Infrastructure Investment and Jobs Act was passed with bipartisan support and signed into law on November 5. However, the Build Back Better Act is now in doubt after Democratic Senator Joe Manchin announced that he would not be supporting the current draft. It will cost almost $2 trillion.
According to some estimates, if the spending plan makes it to the president’s desk it will increase the deficit by $360 Billion over 10 years. This would make it imperative to increase tax revenue. A thriving crypto industry is an important battleground for Democrats. They see the potential to make some money from it, and a need to stop tax evasion using digital tools.
It is clear that the Biden administration will pursue a strict regulatory agenda for 2022. Next year will bring more congressional hearings, but more consequential negotiations will take place behind closed doors. Democrats will then have to decide whether the SEC or CFTC should be in charge of crypto oversight. It is hard to believe that Republicans will allow their opponents to decide the fate the industry’s fate, despite Sharrod Brown’s recent remarks about “with or without Congress”.