Major players in the crypto industry want favorable regulations, and they’re actively explaining their own visions.
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There’s a growing push from the crypto industry to suggest how regulators can approach this rapidly-growing sector.
Why it matters
Crypto exchanges Coinbase and FTX, venture capital firm Andreessen Horowitz (a16z) and the Digital Dollar Foundation have all recently published suggested policy proposals for addressing the digital asset market, ranging from creating a dedicated regulator for crypto to detailing how a central bank digital currency could address privacy issues.
Clearly, the industry is hoping to have a hand in creating a favorable regulatory regime in the U.S.
Breaking it down
So, these proposals could be seen in two different ways. The first is as a serious policy push that industry players hope will one day come to fruition. The other is an effort to kick-start a conversation around how crypto should be regulated.
I was in Washington, D.C., last week meeting folks both from industry and from the offices of various lawmakers and it’s really not yet clear to me what sort of traction these industry-driven proposals will gain. Ignoring for a minute the difficulties in passing a bill through both the U.S. House of Representatives and Senate, the proposals themselves would require buy-in from a broad swath of both regulators and the lawmakers overseeing them.
Much of the reception to these proposals has been that they may all be nonstarters. Lawmakers aren’t interested in letting the crypto industry define the terms of its regulatory framework for various reasons, according to some of the individuals I spoke to. On a substantive level, even crypto-friendly lawmakers seem to disagree with the premise of pouring excessive resources into developing novel tools for overseeing crypto.
Tweets and public statements lambasting regulators are also not impressing the lawmakers who might look at these proposals. They might even be counterproductive if the goal is to be taken seriously, say Washington insiders.
(Seriously, it’s kind of amazing how many different people brought up recent tweets as examples of how to not make a case for favorable crypto regulation.)
If these proposals aren’t meant to be taken literally, but rather as a spark for conversation, then they may actually be going somewhere. While the proposals themselves are varied in scope, they share some common themes: being precise in defining terms, calling for greater transparency and user privacy concerns.
We know that the President’s Working Group on Financial Markets plans to publish its stablecoin report soon, which will call for Congress to enact legislation treating stablecoin issuers like banks. One of a16z’s proposals recommended something similar, which may be helpful for lawmakers who are looking for industry input if they try to craft this kind of bill.
Clearer definitions of tokens may also help, for the crowd that sees a distinction between utility tokens and security tokens. The Securities and Exchange Commission (SEC) has so far maintained there’s no real difference in the U.S., but safe harbor proposals from Commissioner Hester Peirce and Rep. Patrick McHenry (R-N.C.) would create these distinctions if enacted, from which startups and other industry advocates would benefit.
It’s clear regulations are coming. It’s also likely pushback will be involved along the way. One project may know that better than most.
Novi’s first steps
Novi, Facebook’s digital wallet subsidiary, announced a small pilot project last week in partnership with stablecoin issuer Paxos and crypto exchange Coinbase’s custody wing. Under the terms of the pilot project, which will launch in the U.S. and Guatemala, Novi customers can purchase Paxos dollars (USDP) and the company will store the funds with Coinbase Custody.
Just hours later, five U.S. Democratic senators published an open letter ordering Facebook to cease and desist, adding on an order to discontinue work on its own Diem project for good measure.
Even though only Democrats signed the letter, I’m told that a dislike of Facebook is one of the few truly bipartisan issues in Washington right now.
The bad news for Diem, and by extension projects like Novi, is that it’s also maybe inextricably linked to Facebook due to how the social media giant announced the project in 2019.
Novi, of course, is also a direct subsidiary to Facebook, which likely didn’t help it on the reputational front last week.
A lot of the current conversation around stablecoin regulation can trace its origins back to the original Libra project announcement. While the industry has changed since then, the perception of Facebook hasn’t. Recent reports about Facebook won’t help.
The thing to watch for now is whether Facebook will continue with its pilot project or proceed to a full launch of the Novi wallet or whether it will suspend these operations in light of congressional opposition.
Diem, which is a separate entity, faces a similar question. A few months ago it announced it was partnering with Silvergate Bank to launch a dollar-pegged stablecoin pending regulatory approvals. These approvals are still pending and there isn’t a clear timeline right now for when this may launch.
Changing of the guard
Acting CFTC Chair Rostin Behnam will face the Senate Agriculture Committee tomorrow in a hearing considering his nomination to serve a full term as chair.
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Outlook's spam filter seems to punish people who email you frequently, but not random crap. So campaign statements go into the junk folder, but I never miss emails like "Hi, Dave, I see you cover crypto and thought you might want to cover this press release."
— David Weigel (@daveweigel) October 26, 2021
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