What does it take for the notoriously anti-central bank, anti-regulation cryptocurrency community to start considering consumer protections and government oversight?
Losing a whole bunch of money.
Bitcoin just booked a record eighth consecutive weekly loss. The cryptocurrency and its peer, Ethereum, are both down 60% from their respective peaks. The overall global cryptocurrency market has lost an estimated $1.7 trillion since November.
The sell-off has called several of the crypto industry’s narratives into question. For example, enthusiasts who long advocated for digital assets as a hedge against inflation and central banks now say inflation and rising interest rates are primary causes of the downturn. And so for much for being uncorrelated assets — the sell-off, especially in bitcoin and Ethereum, appears to mirror the performance of traditional technology stocks.
For some of the industry’s leaders, the lesson may be that regulations aren’t such an evil thing after all.
After TerraUSD, a “stablecoin” pegged to $1, and sister token Luna collapsed last week — wiping out some investors’ entire life savings — Ethereum co-founder Vitalik Buterin suggested taking action to help small investors recoup their losses and cited the Federal Deposit Insurance Corp. as “obvious precedent.” Though Buterin didn’t go so far as to call for a federal agency to serve as a backstop for crypto investors, it was still remarkable to those who have long followed the industry and its caveat emptor ethos.
Cryptocurrency has roots in libertarian free-market ideals, distrust or disdain for government and a dream of disrupting central banks. Resisting regulation has been a feature since the beginning.
The Bitcoin Foundation, an early attempt by the industry to work with government and traditional financial services firms, was plagued by scandals, such as vice chairman Charlie Shrem's being sentenced to two years in prison in 2014 after pleading guilty to a money-laundering scheme. The Chamber of Digital Commerce launched that same year to fight against regulations but upset some members when it invited traditional banks into the fold, according to the Wall Street Journal. In 2020, crypto exchange Coinbase left the Blockchain Association after it accused the lobbying group of overlooking competing exchange Binance’s international infractions and a Securities and Exchange Commission investigation.
As recently as April, PayPal and Palantir co-founder Peter Thiel threw $100 bills into the Bitcoin 2022 conference audience to drive home his point about cryptocurrency’s superiority to government-backed money.
"Even being in a stock, you're effectively being in something that's like a government-linked entity,” Thiel said. “Woke companies are sort of quasi-controlled by the government in a way that bitcoin never will be.”
Now, the industry is starting to sing a different tune.
The Blockchain Association is working directly with Sens. Cynthia Lummis, R-Wyo., and Kirsten Gillibrand, D-New York — who both own bitcoin and receive campaign contributions from the crypto community, according to Bloomberg — on legislation to regulate the market. And many on fintech Twitter celebrated when President Joe Biden’s administration said it would press Congress to demand that cryptocurrency exchanges separate customers’ money from corporate funds.
“We, and many of the advisers we work with, believe that additional regulatory clarity will play a pivotal role in spurring more financial innovation,” said Ben Cruikshank, head of Flourish, the MassMutual-owned fintech that offers a crypto-for-RIAs infrastructure, Flourish Crypto. “In addition to protecting investors, additional regulatory clarity and engagement will provide innovators with the certainty they need to invest and build for the future.”
It's easy to be cynical about an industry that fought tooth and nail against regulations while value was skyrocketing, only to come around once things fell back to Earth. But those in the industry don't see it that way.
The change is more a sign of a market that is growing and maturing, said Alex Tapscott, managing director of the digital asset group at Ninepoint Partners, an $8 billion investment firm based in Toronto that focuses on alternative strategies. With so many newcomers entering to space, including companies like Flourish that are hoping to provide highly regulated businesses like financial advisers with access to crypto, there are more viewpoints in the conversation.
“Bitcoin is widely held by various kinds of investors and is becoming just another financial asset,” Tapscott said. “There is still a core constituency within the community that believes in the benefit of being your own bank and not having to trust a financial intermediary.”
“Long term, there is going to be more regulation in this space, and for centralized crypto assets like Coinbase, that’s a good thing. It provides clarity, and regulation is not inherently evil,” he added.
The industry got serious about working with, rather than against, the government after crypto lobbyists failed to remove a provision from the 2021 infrastructure bill that required cryptocurrency brokers to file tax forms with the Internal Revenue Service.
Three former SEC chairs, three former chairs of the Commodity Futures Trading Commission, three former U.S. senators and at least one former White House chief of staff, former Treasury secretary and former chair of the FDIC now either work for or advise cryptocurrency firms or investment funds, the WSJ reported. The Tech Transparency Project has identified more than 200 former staffers of federal agencies and national political campaigns who have gone to work in crypto.
Industries employing lobbying firms to influence policy is nothing new, but crypto is unique in that it is so new, there are hardly any written rules or clarity about which agency even has jurisdiction. The goal for crypto lobbyists is to create new, industry-friendly laws and fight against efforts to extend existing securities regulations to cover digital assets.
The crypto bros aren’t rolling out the red carpet for regulators any time soon, but they certainly recognize they must act soon to regain investors’ confidence.
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Pro-bitcoin professionals, however, say the cryptocurrency has ushered in change.
“LPL has evolved significantly over the last decade and still wants to scale up,” says one industry executive.
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