Bipartisan Divide: Challenges Facing the Crypto Industry in the US | by Secure Digital Markets | Coinmonks | May, 2023
A bipartisan divide is making it very difficult for the crypto industry to gain footing in the face of U.S. regulations and the resulting confusion means that until 2024 (and possibly after), builders won’t have clarity on what they are and aren’t permitted to do within the United States.
Democrats have been vocal with their attacks on the crypto industry since their 2020 election, and this has come with renewed force since the 2022 midterm elections. A large part of this is because fraud is common in the cryptocurrency space, and 2022 had record levels of fraud.
Additionally, there are many assets that function with no distinction from a security, making regulation a necessity.
The “regulation by enforcement” method leaves very little clarity for would-be entrepreneurs. Republicans have taken up the cause and started arguing that the United States is being unfriendly to innovation and may scare off these jobs.
Sweeping Crypto Regulation Is On the Way
The New York Attorney General, Letitia James, recently proposed sweeping regulations for the cryptocurrency industry. The stated goals of this legislation are to address concerns about market manipulation, fraud, and investor protection. If implemented, these regulations would require cryptocurrency businesses to register with the state and provide detailed information about their operations.
The proposal also includes measures to enhance transparency and accountability in the industry, such as requiring businesses to disclose their ownership and financial information.
The regulations are still in the proposal stage and would need to be approved by the New York State Legislature to become law. However, critics argue that these are burdensome regulations that reflect an unkind bias towards cryptocurrencies as a whole.
Similarly, the SEC Chairman, Gary Gensler, is calling for more authority and resources to regulate the cryptocurrency market. It’s his belief that increased regulation is necessary to protect investors and ensure market integrity. He highlights the need for investor protection, anti-fraud measures, and oversight of cryptocurrency exchanges.
Gensler’s call for expanded regulatory power signals the SEC’s intention to play a more significant role in shaping the future of the cryptocurrency market. The SEC has already taken action against several crypto projects and is actively pursuing enforcement actions against entities that violate securities laws.
Where Is The Regulatory Clarity?
In a recent press conference, Gensler wouldn’t even give a clear answer to the simple question of whether Ethereum was a security or a commodity.
This lack of clear guidelines is a common pattern in crypto regulations. Coinbase is currently facing potential legal action from the SEC and have announced their plans to file a legal challenge to establish a regulatory framework through formal rulemaking, rather than relying on enforcement actions. The legal challenge comes as Coinbase faces potential enforcement action from the SEC regarding its proposed lending program.
Regulating by enforcement, particularly in the context of cryptocurrencies, refers to a regulatory approach where authorities actively investigate and take legal action against individuals or entities that violate existing laws and regulations in the cryptocurrency space. Instead of relying solely on pre-established rules and guidelines, regulators proactively identify and pursue enforcement actions against those engaging in fraudulent or unlawful activities.
Coinbase’s CEO, Brian Armstrong, has been vocal about the need for clearer regulations in the cryptocurrency space to foster innovation and protect consumers. He argues that the lack of regulatory clarity creates a disadvantage for U.S. companies compared to their international counterparts.
DeFi founders at the risk of having their token labeled a security or running afoul of other unclear legislation have no choice but to leave the country. Another worry is that the Restrict Act, which many know as the “Tiktok ban” may lead to crippling attacks on crypto.
By employing a regulatory approach centered around enforcement actions, regulators aim to deter misconduct, protect investors, and maintain market integrity. However, relying solely on enforcement actions may not provide comprehensive guidance for industry participants or address emerging regulatory challenges.
The Democrats Are In Attack Mode
In December 2022, U.S. Senators Elizabeth Warren and Roger Marshall introduced the Digital Asset Anti-Money Laundering Act of 2022. This is just the latest in a long string of proposed legislation around cryptocurrencies.
Elizabeth Warren is one of the most prominent politicians to adopt an anti-crypto stance as part of her reelection campaign. Warren has criticized cryptocurrencies for their environmental impact, the potential for fraud, and lack of regulation.
Senator Warren has called for stricter regulations and even the potential banning of cryptocurrencies.
Warren’s campaign against cryptocurrencies aligns with her broader progressive agenda and focus on consumer protection. But it also risks alienating those who support the growth and innovation of the cryptocurrency industry.
The White House is reportedly pushing for a punitive tax on cryptocurrency mining as part of its broader efforts to fund infrastructure investments. The proposed tax would add a tax that amounts to 30% of miners’ energy costs, while not doing this to any other industry. Critics argue that such a tax may drive miners out of the United States.
This is just the newest attack on cryptocurrencies. In March 2023, Biden signed an executive order aimed at increasing the oversight and regulation of cryptocurrencies in the United States. The executive order seeks to address several key concerns surrounding cryptocurrencies, including their potential use for illicit activities such as money laundering and ransomware attacks.
The impact of the executive order on the cryptocurrency industry and market dynamics is yet to be fully realized, but it signals a shift toward increased government involvement and regulation in the sector.
On the surface, every one of these enforcement actions sounds logical. No one thinks there should be more fraud and worse consumer protections. It is the irrational bias that is concerning because it throws out much of the good with the bad and makes it very hard to operate a crypto company within the U.S.A.
Republicans Call Out Hostile Approach to Crypto Industry
Republicans have countered with the charge that Democrats are making it impossible to start a company in the States and this is going to push innovation out of the U.S.A.
Republicans have increasingly shown a favorable stance toward cryptocurrencies, with some prominent figures openly supporting and advocating for the industry. Senator Cynthia Lummis of Wyoming, a Republican, has emerged as a strong cryptocurrency advocate, having purchased Bitcoin and accepting cryptocurrency donations for her campaign. She plans to introduce comprehensive cryptocurrency regulations aimed at integrating the technology into the existing financial system.
House Minority Leader Kevin McCarthy has called for a friendlier approach toward Bitcoin, emphasizing the importance of blockchain technology and expressing concerns about China’s dominance in the sector. Senator Ted Cruz has also shown support for the cryptocurrency industry, expressing a desire for Texas to become a hub for Bitcoin and crypto-related activities.
The decentralized nature of cryptocurrencies aligns with libertarian principles, appealing to those who are skeptical of government influence and prefer transactions without intermediaries like banks or government agencies.
It has become the Republican position that the United States should adopt a more supportive and competitive approach to attract and retain crypto businesses and talent. They believe that excessive regulation could push crypto entrepreneurs and investors to seek more favorable jurisdictions, leading to a loss of economic opportunities and talent in the United States.
Critics argue that the government’s approach fails to recognize the potential benefits and transformative power of cryptocurrencies, such as financial inclusion and technological advancements. Analysis shows that the relationship between the federal government and the crypto industry is complex, with ongoing debates and conflicts of interest shaping the regulatory landscape.
No Clarity In Sight… But Crypto’s Success May Be Inevitable
In response to all of these interventions, House Republicans are proposing the establishment of a bipartisan task force to collaborate on developing regulations for cryptocurrencies. The task force aims to address the growing concerns surrounding the regulatory framework for cryptocurrencies and explore potential legislative solutions.
House Financial Services ranking member Maxine Waters commented that “to the extent there are actual gaps in our laws, such as limitations on the SEC’s reach overseas, we should focus on those and not on creating more complexity through a whole new regulatory framework.”
Legislation is inevitable, but what is preventable is the politicization of crypto and ambiguous laws that harm innovation. From within the party, Democratic presidential candidate Robert F. Kennedy Jr. tweeted in support of the idea that there was an “extra-legal war on crypto.”
Republicans have unexpectedly become “the crypto party.” The growing Republican interest and support for cryptocurrencies indicate a shift in the political landscape and highlight the potential for bipartisan discussions and collaborations on cryptocurrency-related legislation.
The uncertainty is going to ensure not much happens until 2024 and even after that, it may be too onerous to start a company in the United States. However, this uncertainty may be an opportunity for those looking at the bigger picture.
Regardless of what happens in the U.S. political system, the crypto sector will continue to advance. There are innovation hubs all over the world, and this technology has shown remarkable resilience.
It wasn’t so long ago that India and China were banning cryptocurrencies, and that didn’t slow down advancement one bit. To allocate some funds to this new asset class, book an introductory call with our team and we’ll show you how easy it is to onboard and start trading.
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