The crypto lobbying boom kicked off last year, sparked by a broadly-worded provision in the bipartisan infrastructure bill. Many in the industry argued that the language would subject crypto miners and software developers to a tax requirement that was really aimed at crypto exchanges.
The situation was a case study in the challenges of navigating Congress during a high-stakes negotiation. The provision was added at the last minute. It was roundly criticized by lawmakers on both sides of the aisle, and yet made it into the bill anyway because of a procedural issue. The nascent crypto lobby chalked it up as a loss, but the lesson was learned: New laws were coming down the pike whether or not crypto companies were ready for them.
In 2017, during the last crypto bull market, the crypto industry spent a measly $200,000 on lobbying. In 2021, that number climbed to $4.9 million, according to new research from analytics firm Crypto Head, with a good chunk of the increase coming after the fight over the crypto provision.
It was a wake-up call for the industry, but it wasn't the only thing spooking crypto companies into shelling out for a lobbying presence on Capitol Hill. The industry was also seeing a growing number of enforcement actions, congressional hearings, and public comments from the likes of SEC Chair Gary Gensler, Treasury Secretary Janet Yellen, and Fed Chair Jerome Powell signaling that major new rules and regulations were in the works and possibly coming soon.
This took some adjustment on the part of the crypto industry, which for many years was seen as either a novelty or a barely-understood threat at the margins of the technology sector .
"For the longest time in the industry, folks had the opinion that crypto was going to be unregulated or that they could just abide by the current laws," said Ron Hammond, director of government relations at the Blockchain Association, an industry lobby group. "The reality is that this is not the case. Laws need to be rewritten or tweaked. New laws need to be made."
In many ways, the future of crypto has never been more uncertain in the United States. Possible outcomes range from federal agencies effectively regulating the industry out of existence to Congress passing comprehensive new laws that clear the way for its expansion. In between are pressing questions about what crypto means for securities, taxation, and banking regulations.
"It's not been this busy in the five years I've worked on this issue," said Hammond.
Education to Lobbying
Candace Kelly, general counsel at the Stellar Development Foundation, a nonprofit blockchain organization, remembers when she first started reaching out to lawmakers about crypto in 2019.
At the time, she said, the most exposure they had to crypto was through Facebook's Libra (later renamed Diem), and the controversial stablecoin project didn't necessarily make her job any easier.
"There were still a lot of people who either didn't understand or only understood the scary use-cases, like illicit finance, terrorist financing, money laundering, or ransomware," she said.
That meant that most of her job early on was trying to educate lawmakers about the use-cases for crypto and blockchain technology. Since then, the level of awareness and education has grown significantly — even if some lawmakers are more knowledgeable than others.
In her view, for example, the House Financial Services Committee is the most in-the-know on crypto issues, while the House and Senate Agriculture Committees, which oversee the U.S. Commodity Futures Trading Commission (CFTC), are still catching up. "Everyone is sort of at a different level of education, so we have to make sure we're meeting people where they are."
They also have to contend with different visions of how crypto should be regulated. The SEC and CFTC are in the middle of what some describe as a turf war over who should regulate cryptocurrencies. The debate gets to the question of whether digital assets are securities or commodities, a distinction that could have major implications for how they are regulated.
As the rubber hits the road in terms of writing new legislation and rules, crypto lobbyists are transitioning from an education-focused approach to direct engagement on policy issues.
In addition, the spate of recent enforcement actions — such as the SEC's $100 million penalty on BlockFi this week — are pushing crypto firms to wade into the lawmaking process.
"It's obviously faster and easier to bring an enforcement action than it is to get a bill drafted, much less passed," Kelly said. "Obviously, there's some correlation there, to the extent that enforcement actions are watched so carefully because the regulations are unclear."
Bearing this out is Ripple Labs, which has spent the most on lobbying among crypto firms at nearly $2 million over the last five years. The company also happens to be duking it out with the SEC over allegedly violating investor protection laws. Right behind Ripple Labs in terms of spending is Robinhood, which is also under the microscope at Capitol Hill. Following up those major companies is the Blockchain Association, which has seen a boom in membership.
But as Hammond pointed out, if you're facing an enforcement action, you're already too late. "These efforts need to be built out years in advance, and the smart folks know that."
So, what's on the docket now for crypto lobbyists? He said there are a handful of issues that are top priorities for lawmakers, and stablecoins are the clear frontrunner.
The fiat-backed digital tokens are the center of a congressional debate over banking regulations, auditing requirements, and what legally counts as money.
"In the five plus years I've worked on Capitol Hill, this probably has the most legs in terms of legislation," said Hammond, which he attributes to the Biden administration's efforts to get ahead of the issue with the President's Working Group on Financial Market's stablecoin paper.
Several bills are circulating, including a draft bill from New Jersey Rep. Josh Gottheimer that splits the difference between the PWG's recommendations and crypto interests.
The other issue, mentioned above, is the question of whether cryptos are securities. As regulators like the SEC make enforcement actions based on their definition, pressure is mounting for Congress to pass a law clarifying what is and is not a security.
In addition, decentralized finance is increasingly emerging as a priority, even though lawmakers are still getting up to speed on the issue.
"In terms of crypto policy knowledge, it's about two years behind," Hammond said.