Regulating Cryptocurrencies: A Battle for the Future of Power

There is no doubt that Zuckerberg has changed cryptocurrency.

Facebook deliberately chose a calm period to launch its crypto token. 18 days before the launch of Libra, the Financial Stability Board (FSB) had just made a judgment: cryptocurrencies "do not pose a significant risk to the existing financial system."

Who would have thought that once Zuckerberg appeared, the regulatory authorities changed their previous indifference and launched a heavy blow against cryptocurrencies. After three years of negotiations, Zuckerberg could only watch Libra's coffin close.

After this incident, regulators who felt out of control vowed to let other cryptocurrencies also taste the hammer of capitalism. However, in the actual supervision process, all parties actually have their own calculations, and the result is: everyone is in charge, but it seems that no one is in charge thoroughly.

Zuckerberg at the Libra hearing

On March 8, the Biden administration issued the first executive order targeting digital assets in U.S. history, calling for strengthened regulation. But unexpectedly, those who oppose regulation were also excited because the wording of the executive order was ambiguous and did not specify the main regulatory agency. This gave supporters and opponents of regulation room to attack each other.

Cryptocurrency is not only about finance, but also an important clue to digital hegemony and Web 3.0. The political melee between regulators, liberals and other stakeholders is intensifying in the United States.

Regulation: The power to seize the future

One of the special things about cryptocurrency is that it has no clear regulatory position. Although they are all regulators, different institutions have their own ideas and want to incorporate it into their own regulatory system.

The most frequently mentioned regulatory topic is the SEC (Securities and Exchange Commission). The SEC is directly under the U.S. federal government and is the highest regulatory body in the securities industry. The scope of regulation is securities, and it is difficult to directly regulate cryptocurrencies. Under inherently unfavorable conditions, the SEC cleverly turned to the upstream of the industry chain: it determined that the first-party public issuance of coins is a public offering, so the nature of encrypted tokens in this scenario has become digital securities.

In the summer of 2021, as he was leaving office, the Republican SEC chairman sued Ripple Labs, a technology company that had profited from issuing coins, on the grounds that it had "profited from unregistered digital securities."

The crypto community was full of criticism and hoped that the incoming Democratic Party Chairman Gary Geisler would pull back from the brink. He had been engaged in digital asset research at MIT for a long time and was seen as a friendly party by the outside world. Unexpectedly, the new official not only said in a public speech that the chaos of cryptocurrency was comparable to the "Wild West"[5], but also called the former chairman a brother and implicitly expressed that he would continue to sue Ripple Labs.

Gary Geisler

Behind the touching friendship across party lines, there are actually more important interests - power that concerns the future. In 2021, the total market value of global cryptocurrencies exceeded 3 trillion US dollars, which is at the same level as Apple's market value.

The lawsuit has not yet been filed, but the SEC has already given the cryptocurrency industry a cold sweat: In September 2021, Coinbase, the world's largest cryptocurrency exchange, originally planned to launch a new crypto token lending product, but was warned of a lawsuit by the SEC and quickly gave up the idea.

The SEC’s number one rival is the Commodity Futures Trading Commission (CFTC), which is also a regulatory agency directly under the federal government. Its jurisdiction is commodity trading, so it has always claimed that the essence of cryptocurrency is a commodity: this statement not only covers Bitcoin and Ethereum, but is also more popular in the crypto community than the SEC’s “digital securities theory.”

However, the CFTC's regulatory authority is concentrated in the field of commodity futures and derivatives trading, and it does not have the power to define spot trading rules, which results in its actual "territory" being far less than that of the SEC. In August last year, the CFTC also issued a $100 million fine to the crypto token derivatives trading platform BitMEX, but the social impact was minimal.

Once the SEC wins the lawsuit, Geisler's claim will be endorsed by the Supreme Court. Seeing that its opponent is getting closer and closer to victory, the CFTC decides to counterattack - you go to the court, then I go to Congress.

On February 9, CFTC Chairman Rothstein Bernanke appeared in the U.S. Congress and requested legislation to give the CFTC the power to regulate spot trading of digital assets. Now, two senators are drafting relevant bills: this has become the CFTC's hope to reverse the situation.

Bernanke, who moved between various congressmen, unexpectedly received lobbying support from cryptocurrency stakeholders. After all, the enemy of my enemy is my friend. Compared with Geisler, who always has a stern face, Bernanke seems much more friendly. The founder of FTX, the world's fourth largest cryptocurrency exchange, spoke publicly at the hearing, hoping that the CFTC can take over the supervision of cryptocurrencies.

Rothstein Bernanke in Congress

While the two major regulatory agencies were racing against time, the U.S. Treasury Department also made several appearances to make its presence felt. It looked at the issue from a monetary perspective and collected taxes through the Internal Revenue Service, which it supervised. In other words, it also had an interest in the matter. The Treasury Department proposed that cryptocurrency transfers of more than $10,000 must be reported to the IRS, which would more than double the number of IRS employees in 10 years[18].

Although the battle between regulators may seem chaotic, the message is clear: the floodgates are about to fall. Cryptocurrency supporters naturally do not intend to sit idly by.

Fighting back: In the name of stifling innovation

In Geisler’s vision, cryptocurrency trading platforms should be registered with the SEC. What frustrates him is that platforms would rather ask for forgiveness after the fact than ask for permission in advance.[19]

In fact, those liberals who support cryptocurrencies don’t even want to go through the SEC.

On March 16, Republican Congressman Tom Emmer sent a stern letter to Geisler, asking him to explain why he frequently requested information from private cryptocurrency companies, and pointed out that the SEC had no right to regulate. Emmer also actively promoted on Twitter: "My office has received a large number of complaints that SEC Chairman Geisler's 'requests' to the crypto community are too heavy and seem to be stifling innovation."

In the U.S. Congress, Emmer belongs to a newly emerging force, the Cryptocurrency Core Group. Like the SEC, the organization's personnel also crosses the two parties. The liberals represented by them try to confront the regulators. They regard cryptocurrency as a technological means, and the existence of regulation will hinder innovation.

Tom Emmer

Compared to regulators caught in a civil war, opponents’ demands are much clearer — legislation.

In the first half of 2021 alone, stakeholders spent about $2.3 million on lobbying organizations, more than double the amount spent on lobbying the previous year. By the end of the year, the amount had risen to $7.2 million.

In the summer of 2021, the Crypto Alliance mainly attempted to target a new provision that would expand cryptocurrency taxation, with the new tax expected to collect $28 billion over the next decade[21]. Although celebrities such as Elon Musk also publicly expressed their opposition to the new regulations, they ultimately failed to prevent the passage of the provision.

After this battle, the "Crypto Alliance" changed its strategy and adopted a two-front war.

The cryptocurrency core group continues to fight in Congress with a clear division of labor:

Emmer continued to confront Geisler. To this end, he won over a Democratic congressman and tried to draft a bill to ensure that the SEC had no right to intervene in cryptocurrencies. "My mission is to keep cryptocurrencies away from Geisler's clutches," he said publicly. "His mission should be to protect American investors, not to become the king of finance[9]."

Among the remaining lawmakers, some are tasked with drafting provisions to protect innovation, while others are seeking to fight back against expanded tax provisions.

The hidden line is "surrounding the cities from the countryside": first influence the laws of each state, and then force Congress to legislate.

Unlike the federal government, many state-level politicians have realized that cryptocurrencies are increasingly linked to votes, so they have simply embraced cryptocurrencies and maintained close ties with related private companies.

The spark was first ignited in Florida: in March 2022, after less than 4 minutes of debate, the state House of Representatives unanimously passed a bill to relax cryptocurrency trading regulations. The subsequent House of Representatives' deliberation speed once again broke the record: it took only 75 seconds for the bill to be placed on the governor's desk for his signature.

Florida passes bill to ease cryptocurrency trading regulations

According to official statistics from the United States, at least 40 states will participate in 2022 and submit 153 cryptocurrency-related bills[11].

Today, the game between cryptocurrency supporters and regulators is becoming increasingly intense: in April, at least five different regulatory agencies in the United States and the United Kingdom made speeches on cryptocurrency regulation[13]; on the other hand, the opposition is also stepping up the legislative process.

The final outcome of this war will not only determine who will own the power in the future, but also determine whether the United States can continue to maintain its digital hegemony in the Web 3.0 era.

Exploration: The next revolutionary framework

In 2019, Jeff Koseff, a professor of cybersecurity law at the U.S. Naval Academy, wrote a book that influenced the entire industry - "The 26 Words That Created the Internet", linking the remarkable achievements made by the United States in the Web 2.0 era with a legal provision consisting of 26 words.

This provision is Section 230 of the Communications Standards Act: "No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider."

In other words, even if users post radical remarks on the Internet platform, the platform will not be held responsible. This means that the platform can save on all content review costs and can even actively use extreme and illegal content to generate revenue.

The birth of Section 230 is actually related to The Wolf of Wall Street: In 1995, an anonymous user posted that the company where Leo worked had committed securities fraud, which made the other party sue the forum. At that time, the position of the Internet in American law was very vague. To solve this problem, Congress introduced Section 230 the following year to help the defendant forum clear itself of responsibility.

Ironically, securities fraud was proven to be true a few years later. At the cost of the fall of Wall Street elites, Silicon Valley was completely freed from its shackles.

Section 230 of the Communications Standards Act is a reflection of the United States’ long-standing regulatory philosophy: it is best to leave innovation and problem solving to the market. This principle has contributed to the prosperity of the United States’ past innovation economy.

Trump has publicly opposed Section 230

Bills and clauses will continue to be updated, but the topic of cryptocurrency is more difficult than ever before because the regulatory direction in the United States is not continuous and is highly affected by domestic and international environments.

Due to the changes in the social environment, "Neo-Luddism" has begun to take root in all walks of life in the United States: they began to oppose all innovations and demanded that the government take a high-pressure approach, whether it is genetic modification, artificial intelligence or cryptocurrency. Even experts engaged in future research at MIT are calling on the federal government to tax robots to slow the spread of automation.

But cryptocurrencies are still showing signs of moving forward.

The regulation of cryptocurrencies can be seen as a game between finance and technology. The regulation surrounding Libra is largely due to concerns that it will challenge and undermine the traditional banking and financial system. However, the right to speak is flowing from Wall Street to Silicon Valley. The gradual formation of the regulatory framework for Bitcoin over more than 10 years is a proof of this: the framework is management and also guarantees its circulation.

For liberals like Emmer, the best outcome of this battle for regulatory power is a "cryptocurrency version of Section 230." Judging from the current situation, the long march has just begun.

end

Historical experience shows that there will inevitably be lags in supervision.

The SEC was established after the Great Depression. Despite calls for regulation of the Internet for so many years, monopoly and abuse still exist. An extreme case occurred in Wisconsin: some gun e-commerce websites openly sold guns to people who were clearly prohibited from owning guns under the law, but the state court ruled that the platform was not responsible due to Section 230[15].

It is unrealistic to expect legislation or regulation to be improved before the industry has fully matured. In a sense, the delay in regulation also gives practitioners time to explore solutions that are (temporarily) unregulated[20].

But in the field of cryptocurrency, thanks to its decentralized nature, cryptocurrency did not first become popular in a few countries as in the past, but instead blossomed all over the world.

At the end of 2019, the digital RMB produced by the People's Bank of China based on blockchain technology has started pilot testing in some cities. Unlike other countries' private currency issuance, China's "national team" is trying to be a leader. Biden obviously does not want to lose to the mysterious power from the East. In March, Biden has instructed federal agencies to evaluate the conditions required for the United States to issue central bank digital currency.

The era of a major reshuffle is approaching, and time is running out for a regulatory “civil war” in the United States.

[1] Zuckerberg’s three-year dream of issuing a coin has been shattered: it started with a high profile, ended with a tragic ending, and was filled with bitter tears in between, Silicon Star

[2] FACT SHEET: President Biden to Sign Executive Order on Ensuring Responsible Development of Digital Assets

[3] ROBERT CRUZ OF SMARSH TALKS ABOUT BIDEN'S INCOMING CRYPTO REGULATIONS, Analytics Insight

[4] US cryptocurrency regulatory path appears long and complex, INSIGHT

[5] Remarks Before the Aspen Security Forum

[6] The Race to Regulate Crypto: CFTC vs. SEC, Jurist

[7] Ripple Effects of Recent Discovery Decision in SEC v. Ripple Labs, Inc.Holland Knight

[8] CFTC Chair Asks Congress for Authority to Regulate Some Cryptocurrencies, The Wall Street Journal

[9] Meet the 'crypto caucus': the US lawmakers defending digital coins, Financial Times

[10] Bitcoin Fans Are Suddenly a Political Force, The Wall Street Journal

[11] Crypto Industry Helps Write, and Pass, Its Own Agenda in State Capitols, The Wall Street Journal

[12] Politicians are waking up to the fact there are votes in crypto, Financial Times

[13] April Is Crypto Regulation Month, Observer

[14] Twenty-Six Words Created the Internet. What Will It Take to Save It, Propublica

[15] The Case for Rethinking Section 230 While Dismantling Tech Monopolies, The Reboot

[16] Understanding the US National Innovation System, 2020, ITIF

[17] The future of regulation, Deloitte

[18] US Treasury Department proposes that cryptocurrency transfers over $10,000 must be reported to the IRS, Reuters

[19] Crypto platforms need regulation to survive, says SEC boss, Financial Times

[20] Financial Times Interpretation: Why the cryptocurrency sector has remained unregulated for a long time

[21] The United States plans to impose taxes on cryptocurrencies to support infrastructure, Sina Technology