At 2:36 p.m. Wednesday, the message went out on Twitter: “Crypto Red Alert!”
And after years of debate over how to improve America’s infrastructure, and months of sensitive negotiations between the White House and lawmakers, the $1 trillion bipartisan infrastructure proposal suddenly stalled in part because of concerns about how government would regulate an industry best known for wild financial speculation, memes — and its role in ransomware attacks.
On Saturday, the Senate took a procedural step toward passing the infrastructure bill — expected to occur over the next few days — but remained divided over how heavy a hand government should take in overseeing the industry.
Sen. Rob Portman (R-Ohio) and the Biden administration had agreed on a proposal that would give federal regulators authority to impose new tax reporting obligations on cryptocurrency brokers, which enable traders to buy and sell cryptocurrency. The crypto provisions emerged as lawmakers struggled to find ways to pay for the bill, with nonpartisan estimates suggesting the tax changes — which would codify work the Internal Revenue Service was beginning to undertake — would increase federal revenue by about $28 billion over 10 years.
But an odd-couple coalition of liberals concerned about government overreach into tech and conservatives skeptical of financial regulation have pushed back strongly against the plan, which, they argue, would harm innovation.
The disagreement has led to a days-long stalemate — continuing Saturday — in which negotiators fiercely contested details over which parts of the complicated cryptocurrency sector would be subject to the new requirements.
Regardless of the measure’s ultimate fate, the fact that crypto regulation has become one of the biggest stumbling blocks to passage of the bill underscored how the industry has become a political force in Washington — and previewed a series of looming battles over a financial technology attracting billions of dollars of interest from Wall Street, Silicon Valley and financial players around the world, but that few still understand.
“What I think you’re seeing is the maturing of the industry — you see the crypto folks now understanding how Washington can influence their world and Washington learning a little bit about the technology,” said Mick Mulvaney, former chief of staff under President Donald Trump, one of several former officials to be recruited to the crypto industry in recent years.
“One of the challenges that legislators face is they are still learning the language of crypto,” said Mulvaney, who joined the advisory board at the blockchain trade group Chamber of Digital Commerce in September.
Cryptocurrency is a medium of exchange that allows people to transfer value to others without needing a government overseeing it or a financial institution acting as a middleman. Cryptocurrencies have ballooned into a $1.7 trillion industry from nothing in a little over a decade. There are bitcoin, Ethereum, XRP and many others. All are digital currencies with transactions recorded in a decentralized system.
Once an obscure fascination of the tech set, cryptocurrencies today are close to mainstream acceptance, with growing interest from institutional investors — as well as lawmakers and financial regulators who see the potential for misconduct.
The companies also have beefed up lobbying efforts, attracting a bipartisan set of former officials.
Max Baucus (D), the former Montana senator, landed a job earlier this year advising cryptocurrency exchange Binance. In May, Rosa Rios, U.S. treasurer during President Obama’s administration, joined the board of blockchain start-up Ripple.
Cryptocurrency firms today have nearly 60 registered lobbyists. Five years ago, they had one, according to the Center for Responsive Politics. They are also on track to spend more than $5 million on lobbying this year, twice the total from just last year.
“They see the writing on the wall and they want to get ahead of regulations,” said Casey Burgat, director of George Washington University’s legislative affairs program. “I’m just surprised it took them this long to ‘lobby up.’”
But suspicion of this new kind of money runs high. Cryptocurrency — celebrated for being largely untraceable — faces criticism for its potential role in drug-dealing, money laundering and online ransomware attacks. Some enthusiastic supporters also draw quizzical looks for claims that the technology has the potential to create beneficial societal changes and total freedom from central banking powers. The technology has also generated concerns about its potential to worsen climate change by demanding huge amounts of energy to produce the coins.
Attempts to craft regulations are unusually difficult because cryptocurrency and its digital recording system known as blockchain are notoriously complex topics. That leaves plenty of room for lobbying members of Congress who are unlikely to have a deep understanding, some officials say.
Senators on Saturday were searching for a path of compromise between two different approaches. One, favored by the crypto industry and advanced by Sens. Patrick J. Toomey (R-Pa.), Ron Wyden (D-Ore.) and Cynthia M. Lummis (R-Wyo.), would specifically exempt cryptocurrency miners and software developers from new tax reporting obligations that they say would prove impossible technically to meet. Cryptocurrencies depend on “miners,” individuals and firms who through complex computing processes produce digital coins, such as bitcoin.
The Biden administration has maintained it has no intention to impose the reporting requirements on miners, but expressed concern that including broad exemptions could provide a loophole exploited by the industry to avoid tax compliance.
In an effort to find a middle ground, the administration and Sens. Rob and Mark R. Warner (D-Va.) proposed exempting only one category of cryptocurrency miners, but under intense industry blowback agreed on Saturday to broaden their proposal to include another substantial category of mining. But those concessions did not, as of Saturday afternoon, appear likely to satisfy Wyden, Lummis and Toomey, who want much broader exemptions.
The various political coalitions that have emerged around the issue do not fall neatly along partisan lines. Toomey, an advocate of laissez faire economic policies, has praised the innovative technology. He’s one of the few lawmakers on Capitol Hill who has in recent months, as the top Republican on the Senate Banking Committee, made it his mission to understand and embrace blockchain technology, hiring a crypto expert for his staff and becoming a go-to for the industry.
Wyden has been drawn to the issue as one of the Senate’s biggest privacy hawks. Lummis, meanwhile, has billed herself as the first bitcoin owner to be elected to the Senate and represents a state that has become a hub for cryptocurrency innovation.
Portman and Warner, who have been working closely with Treasury officials to craft legislative text that provides regulators more power, have close ties to Wall Street and the banking industry — the systems some say cryptocurrency has the potential to upend.
Meanwhile, liberals like Sens. Elizabeth Warren (D-Mass.) and Sherrod Brown (D-Ohio), who have pressed regulators to ramp up oversight of what they’ve described as an unstable and volatile market that poses a risk to consumers, could ultimately align with conservative national security hawks who view crypto as a growing opportunity for terrorists, money launderers and other criminals.
After years of hoping to avoid government oversight, many in the cryptocurrency world have shifted gears. They see regulation as inevitable. In their eyes, it is better to try to have a role in writing the new rules.
It’s a realization familiar to other industries, such as gambling or marijuana, which once sought to avoid the glare of the federal government. But they all want the blessing to operate nationwide, said George Washington’s Burgat. He pointed to the decision by former House Speaker John A. Boehner (R-Ohio) to join the board of the public cannabis company Acreage Holdings in 2018.
“We do need a legal framework that supports this ecosystem,” said Perianne Boring, head of the Chamber of Digital Commerce. “That does require engagement with regulators and policymakers.”
After the initial bipartisan infrastructure legislation containing cryptocurrency provisions was unveiled, the sector’s nascent lobbying force sprang into action. The Blockchain Association, a Washington-based trade group whose membership has more than quadrupled since 2018, immediately began to team up with other crypto groups and businesses, such as Coin Center and Digital Currency Group.
They coordinated lobbying efforts over Google Meet video calls and encrypted messages on Signal. They used Google Sheets to track congressional office contacts.
“This is a whole new level of coordination and effectiveness that the cryptocurrency industry has been able to have in Washington,” said Kristin Smith, executive director of the Blockchain Association.
“This week has to me felt like a completely different experience than anything else we have taken on as a group before,” Smith said.
Cryptocurrency’s cause has drawn support from Silicon Valley figures including venture capitalists Marc Andreessen and Ben Horowitz as well as big-name investors including Dallas Mavericks owner Mark Cuban.
Crypto’s most vocal proponents believe the hostility toward the industry stems from a failure to look past all the speculation over tokens and ignoring the business opportunities that blockchain technology can generate. Cuban, who’s backing a host of crypto-related businesses, likened the potential of the budding technology to the rise of the Internet.
“Shutting off this growth engine would be the equivalent of stopping e-commerce in 1995 because people were afraid of credit card fraud. Or regulating the creation of websites because some people initially thought they were complicated and didn’t understand what they would ever amount to,” he said in an email to The Post.
The parallels between cryptocurrency’s current battle and how “Big Tech” once approached regulation are notable.
Just as leaders of San Francisco’s tech scene once swore off the “dirty business” of advocacy but later engaged in politics, the cryptocurrency industry increasingly realizes the influence game can work to its advantage, especially as suspicion and scrutiny mount in Washington.
Even as cryptocurrency was fighting to change language in the infrastructure bill, a new potential battle emerged.
It started when SEC Chairman Gary Gensler said in a speech at the Aspen Security Forum Tuesday that he believes most cryptocurrencies should be regulated as securities.
“I believe we have a crypto market now where many tokens may be unregistered securities, without required disclosures or market oversight,” Gensler said. “This leaves prices open to manipulation. This leaves investors vulnerable.”
A day later, Brian Quintenz, a Republican on the Commodity Futures Trading Commission, argued that cryptocurrencies were, in fact, commodities rather than securities.
“Just so we’re all clear here,” Quintenz said in a tweet, “the SEC has no authority over pure commodities or their trading venues, whether those commodities are wheat, gold, oil … or #crypto assets.”
The ongoing disputes over what cryptocurrencies even are signal the depths of the potential problems faced by the industry.
“Any industry wants to be involved in regulation discussions,” said Reid Yager, a former lobbyist and current director of communications at Blockhaus, a blockchain marketing firm. “But explaining all this to a septuagenarian lawmaker is a huge challenge.