Meet the ‘crypto caucus’: the US lawmakers defending digital coins
After months of tortuous negotiations, Joe Biden’s bipartisan infrastructure bill was about to pass Congress last summer when Patrick McHenry became alarmed about one particular element.
Along with colleagues in the Senate, the Republican member of Congress from North Carolina realised that a clause had been quietly inserted into the 2,700-page bill, which forced brokers of cryptocurrency to report their transactions and customer information to the tax authorities.
The clause was intended to clamp down on tax avoidance by those buying and selling digital assets, but the term “broker” was so widely defined it could also apply to the software developers who make crypto products.
For McHenry, who had long been interested in blockchain technologies, the move could badly damage the fast-growing crypto industry.
And he was not the only one. In the weeks that followed, a small group of congressional Democrats and Republicans, who view themselves as defenders of crypto technology, came together in an effort to lobby the bill’s authors to kill the clause.
In the end the Democratic leadership insisted they needed the $30bn the move would raise to help pay for other spending contained within the bill, and it went through with the clause intact.
Nevertheless, the row was a seminal moment for an eclectic group of crypto champions in Congress, made up of free-market libertarians, pro-business advocates and leftwing technology utopians. This “crypto caucus” is set to become one of the most powerful blocs on Capitol Hill in the coming years, as politicians rush to set the rules for one of the fastest-growing industries in the world.
Digital assets have exploded in popularity in recent years, with the big cryptocurrencies now worth a global total of $2tn, up from $14bn five years ago, according to the White House. Surveys suggest about 16 per cent of American adults have bought, used or traded cryptocurrencies, while more than 100 countries are considering launching their own central bank digital currencies.
All this has happened with barely any rules. Gary Gensler, head of the Securities and Exchange Commission, has compared the market to the Wild West, warning it is “rife with fraud, scams and abuse”.
And as regulators such as Gensler try to apply existing investment rules to an entirely new type of asset, there is a growing sense in Congress that elected representatives must step in to clarify what is legal and what is not.
The defenders of the industry are now coalescing around several pieces of crypto legislation that would help define what kind of an asset digital coins are, and what responsibilities their issuers and traders have to consumers and within the market.
“[The crypto tax row] was a big moment for us,” says McHenry, who is promoting a bill that would put into law exactly who should count as a crypto broker. “It enabled me to expand the list of people who were interested in crypto legislation beyond the list of usual suspects.”
In the House, they include McHenry and his longtime friend Tim Ryan, a Democrat from Ohio who together have sponsored a new bill, the Keep Innovation in America Act. Other supporters include Ro Khanna, a prominent progressive within the Democratic party, Josh Gottheimer, a Democratic centrist from New Jersey, and Tom Emmer, a Republican from Minnesota who co-chairs the Congressional Blockchain Caucus in the House of Representatives.
In the Senate, there is the Innovation Caucus chaired among others by Kyrsten Sinema, the centrist Democrat, and Cynthia Lummis, the Republican senator who has purchased between $150,000 and $350,000 worth of bitcoin. Also steering legislation is Ron Wyden, a veteran of liberal politics who has long advocated for net neutrality and internet freedoms.
“In the last few months we have started to witness Republicans and Democrats talking more with an informed, non-partisan approach,” says Emmer. “We are going to become a very powerful policy tool for both the House and the Senate.”
If members can find agreement, this could prove to be as seminal a moment as the mid-1990s, when members of Congress passed legislation that was to set the rules of the road for the internet. Legislation such as the 1996 Communications Decency Act, for example, provided the legal framework, which allowed the likes of Google, Amazon and Facebook to conquer the world.
Supporters of cryptocurrencies believe US companies could similarly come to dominate the world of digital assets, but only if they have clear rules under which to grow. “We are in a similar moment with cryptocurrencies to the one we were in 30 years ago in the early days of the internet,” says Wyden.
From scepticism to leadership
For years, digital assets have been viewed in Washington with suspicion, if not downright hostility. Donald Trump, the former president, tweeted in 2019: “I am not a fan of bitcoin and other cryptocurrencies, which are not money, and whose value is highly volatile and based on thin air.”
Officials in the Treasury and the Federal Reserve have long been worried about cryptocurrencies being used for fraud or money laundering, as well as the chance that unsuspecting consumers could get caught out by sudden collapses in value.
But until recently these assets were too small in number to be considered a threat. A 2019 report by the Financial Stability Board, a panel of global financial regulators, found “cryptoassets do not pose material risks to global financial stability at present”.
Just after that report was issued, however, Facebook announced plans to create its own cryptocurrency. The technology company’s project ultimately collapsed after the Treasury made it clear that it would not give it the green light. But even if a Facebook coin was nixed by politicians in Washington, the proposals nevertheless helped focus their minds on the broader issue.
“It was slightly embarrassing that we had just issued a report saying cryptocurrencies don’t pose a global risk and then one of the biggest companies in the world tried to launch one,” says one US official involved at the time. “But at least it got us thinking seriously about the subject.”
All the while the assets themselves were exploding in value, and a sizeable industry was being created around them. When the global panel of regulators issued its report, the global value of all major cryptocurrencies was $275bn, according to CoinMarketCap, which tracks the data. By the time Joe Biden became president, they were worth $1tn.
Biden signalled early in his presidency that he was serious about regulating the industry by picking Gensler, a former financial regulator who had taught a course on blockchain and money at MIT, to head the SEC.
Since coming to office, Gensler has fired repeated warnings at the platforms where cryptocurrencies are traded, telling them they need to submit to financial regulation or face extinction.
Last September, the SEC warned Coinbase, a cryptocurrency exchange with a market capitalisation of $41bn, that it would sue if Coinbase went ahead with plans to launch a new digital asset lending product. Coinbase quickly dropped the idea.
Many both in the industry and on Capitol Hill, however, worry that watchdogs such as the SEC are regulating without setting the rules — so-called “rulemaking by enforcement”.
“Rulemaking by enforcement is not an efficient way to provide clarity and certainty,” says Gottheimer. “If you don’t provide that, industry will go elsewhere, and that will be a huge loss for our economy and our country.”
Even those who are regarded as hawkish on crypto technologies agree. Elizabeth Warren, the progressive Democratic senator from Massachusetts who has warned that crypto companies scam consumers, harm the environment and permit money laundering, says the “lack of guardrails” needs urgent attention. “Congress and the Biden administration need strong rules to rein in crypto’s risks.”
Under pressure from both Democrats and Republicans in Congress, the Biden White House issued an executive order on cryptocurrencies this month.
The order was incremental on the face of it, mainly containing instructions for government agencies to examine the industry and report back. But for supporters of blockchain technologies, it was a hugely symbolic moment. The White House acknowledged digital assets were not merely a passing fad but “an opportunity to reinforce American leadership in the global financial system and at the technological frontier”.
“The EO was incredibly important in that it talked about US leadership in this area,” says Ari Redbord, head of government affairs at TRM Labs, which uses blockchain to investigate crypto fraud. “We may be moving away from this position of saying we have to ban cryptocurrency, thinking maybe we need to lead in this space.”
What laws may come
Even as financial regulators start drafting their reports for the president, politicians on Capitol Hill have already begun promoting their own legislation, led by the crypto defenders in the Congressional Blockchain and Senate Innovation caucuses.
Gottheimer, who formerly worked at the Federal Communications Commission and at Microsoft, is leading the charge on the most pressing piece of crypto legislation facing Congress: figuring out how to regulate the enormous stablecoin industry.
Unlike purely decentralised digital currencies such as bitcoin or ethereum, stablecoins are pegged to real currencies — usually the dollar — with issuers holding real currency so they can redeem customers and keep the value at a certain level. That promise of stability has drawn in millions of investors: the two largest stablecoins, Tether and USD Coin, are now worth a combined $133bn.
But regulators have been concerned for months about the real value behind such coins. Is every digital coin really backed by a dollar? If not, as many critics suggest, a loss in value could prompt a run on the coin, which could in turn trigger losses in the traditional banking system.
“Tether is a financial Chernobyl waiting to happen,” says one former US financial regulator. “It should never have been allowed to grow so big unchecked.”
Tether called that criticism “misguided and misinformed”, saying its coin was the “largest and most trusted stablecoin in the world”.
Gottheimer is gathering support for a bill that would insist every stablecoin issuer is either a regulated financial institution or proves it can back every digital dollar it issues with dollars, US Treasuries or other liquid and stable assets. He says this would help both consumers and the industry. “It is urgent that we bring some more certainty to the marketplace.”
Others are focused on longer-term issues, including settling the fiercely debated, long-running question of what kind of an asset a cryptocurrency is. When you buy a bitcoin is it actually a commodity akin to a real currency, or a security — effectively, a share in a business controlled by its mysterious, pseudonymous founder Satoshi Nakamoto?
Emmer and his unlikely ally Khanna are jointly promoting a bill that would give a definitive answer: that cryptocurrencies are not a security, and therefore not eligible for regulation by Gensler’s SEC.
This could have significant implications for the industry’s future. If cryptocurrencies are classed as securities, it would force a person or group to claim control of the assets. That would in turn undermine what their defenders see as one of their chief attractions: decentralisation.
“Cryptocurrency for me is part of moving power away from big banks in New York and the big technology companies in Silicon Valley,” says Khanna, a member of the House Progressive Caucus, who backed the leftwing senator Bernie Sanders for president. “That is the promise of crypto.”
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Emmer, who also chairs the National Republican Congressional Committee, comes at the issue from a slightly different perspective — keeping crypto out of Gensler’s clutches. “What [Gensler] is doing right now is creating more harm than it is doing good,” Emmer says. “His mission at the SEC is to protect American investors. He is not meant to be the King of Finance.”
The SEC did not respond to multiple requests for comment.
In the Senate, the fight to limit the crypto tax measures in the infrastructure bill is being led by Wyden and Lummis, the Republican rancher whose enthusiasm for crypto technologies has earned her the nickname “crypto queen”.
Their bill mirrors the one being promoted by McHenry in the House, limiting the definition of who should be counted as a crypto broker for tax reasons.
“I keep going back to the proposition that has driven my interest in technology since I showed up in the Senate, when nobody except [Senator] Pat Leahy knew how to use a computer,” says Wyden. “I want to be on the side of the innovator.”
Coining it in
The cryptocurrency industry is beginning to lend its support to Washington politicians willing to act in its interests.
Figures collated by OpenSecrets, which tracks congressional donations, found that individuals connected with the cryptocurrency industry donated $169,000 in 2017-18, $359,000 in 2019-20 and $600,000 in the current electoral cycle.
These are comparatively small amounts, but much is going to the crypto champions. According to an analysis by the news publication Roll Call, Wyden received at least $63,000 from individuals connected to the industry in 2021, while Sinema was given at least $67,000 and Lummis at least $34,000.
Some members are even accepting donations in cryptocurrency, though this remains a relatively small source of funding given the complex rules over reporting such donations.
The industry also has an increasingly well-organised and well-funded lobbying operation in Washington. Groups such as the Blockchain Association and the Chamber of Digital Commerce have set up in recent years, spending heavily campaigning on issues such as the new tax rules.
According to OpenSecrets, the industry spent $7.2mn lobbying politicians last year, up from $2mn the previous year and just $80,000 in 2016.
The spending reflects the growing influence of this group of lawmakers, as well as an awareness that the decisions made now will determine how crypto assets are regulated for decades.
“These caucuses are ground zero for the industry on Capitol Hill,” adds Perianne Boring, the president of the Chamber of Digital Commerce. “More and more people are getting up to speed on what is happening, and it is making a difference.”
What is striking to members of the crypto caucus is how support for the industry cuts across seemingly entrenched partisan lines. “You can be a traditional liberal, a progressive liberal, a traditional conservative or a libertarian conservative and there are huge opportunities that you can see from this innovation,” McHenry says.
There are limits to the extent that these partnerships across the political divide will be able to agree on everything. “I am not a total libertarian,” says Khanna. “We have to figure out a regulatory scheme for digital assets to make sure transactions are appropriately taxed.”
But if these alliances hold, they could prove to be a rare point of comity in a congressional system frequently criticised for being mired in partisan gridlock.
“Our offices work almost hand in hand together,” says Emmer of his partnership with Khana. “I would not say we are friends, but it is very interesting you can have someone with my political perspective and someone with his perspective and on this issue we are in complete alignment.”
This article has been amended since first publication to correct the combined market capitalisation of Tether and USD coin, which was wrongly denominated in trillions, not billions