President Biden is cracking down on crypto. Future for companies and investors. – Barrons | Jewelry Dukan

The White House wants to bring law and order to the crypto world. His plans take shape.

Backed by an executive order, the White House this week released a series of reports on the government’s plans to regulate the industry. While the reports encourage innovation — including the potential development of a Federal Reserve-backed “digital dollar,” the reports urge regulators like the Securities and Exchange Commission and the Commodity Futures Trading Commission to “engage in aggressive investigation and enforcement,” the white said A house.

The reports follow an explosive White House letter earlier this month on the climate impact of crypto mining, which uses massive amounts of electricity to process transactions, primarily for cryptocurrency mining


Bitcoin.

It looks like another defining moment for crypto companies and investors. And like all things in crypto, the regulatory push is fueling more controversy and uncertainty about whether Washington will figure out how to make rules without breaking the industry’s back.

“It’s clear that the Biden administration has a lot of work to do,” says Owen Tedford, an analyst at Beacon Policy Advisors, a Washington, DC-based policy research firm.

Despite its anti-government roots, the industry seeks regulation, albeit on its own terms. The reasoning is that a legal framework for tokens and trading platforms alongside institutional capital pools like pension funds will attract more mainstream users.

The industry also needs to restore its credibility in the face of the recent explosions. The bankruptcies of major crypto firms like Celsius Network, Voyager Digital, and Three Arrows Capital helped wipe out $2 trillion in the token market, undermining crypto’s appeal to institutional investors and putting pressure on lawmakers to introduce consumer protections.

“The industry is very supportive of introducing consumer and investor protections,” said Brett Quick, head of government at the Crypto Council for Innovation, a trade group whose membership includes

Coinbase Global

(Ticker: COIN) and venture capital firm Andreessen Horowitz.

Political momentum to regulate crypto is clearly increasing. Along with the White House push, bipartisan bills in Congress could settle longstanding issues such as: B. which tokens are considered securities and which authorities should be responsible for oversight.

At stake are rules for exchanges like Coinbase, investment firms like Grayscale Investments, and miners like e.g

Riot Blockchain

(REST) ​​and

Marathon Digital Inventory

(MARA). Token issuers and companies that support decentralized finance networks are nervous about scrutiny from authorities empowered to carry out the President’s orders.

It is clear that the Biden administration has a lot to do.


— Owen Tedford, Beacon Policy Advisors

At the same time, crypto critics see the regulatory dynamics as a Pyrrhic victory. Some consumer advocates see the White House initiatives as a backdoor for crypto to deepen its ties to the financial system. And they worry that more regulation will only increase its appeal to retail investors and pave the way for more investors to lose money in tokens and crypto-related businesses.

“Now we can have a crash where trillions of dollars disappear in months but the systemic impact is nil,” said Dennis Kelleher, CEO of Better Markets, a Wall Street watchdog-turned-major crypto critic has become. “That’s not going to happen if the industry is connected to the core of the banking and financial system.”

White House climate report on crypto illustrates government hurdles Mining operations, with computers running 24/7, consume up to 1.7% of US electricity, while overall crypto activities pump up to 0.8% of US-based greenhouse gas emissions into the atmosphere, the report said. None of this is consistent with the government’s targets to cut emissions by up to 52% by 2030.

So what to do? The White House has suggested several actions the EPA and Department of Energy could take. The most draconian would ban proof-of-work mining — the process used by the Bitcoin network. Other major blockchains like Ethereum have switched to less power-intensive systems, making Bitcoin an outlier.

But a mining ban is also the least realistic solution; Mining would simply shift to other countries. And a potential ban has already prompted the industry to take legal action. “The White House is on questionable legal standing if it ever attempts to ban bitcoin mining,” tweeted Lee Bratcher, president of the Texas Blockchain Council, a trade group that represents crypto mining interests in the state.

This is just a small facet of the management challenges. Friday’s reports detailed crypto’s threats to consumers, financial stability, and the tools the government is using to combat illicit funding. One report even said the Department of Labor should investigate the fiduciary behavior of 401(k) plan sponsors offering crypto as an investment – a blow to Fidelity Investments, which aims to offer Bitcoin in pension plans it manages. Fidelity said it views its crypto product “as a responsible solution to meet the demands of mainstream interest.”

For many crypto companies, regulation is now seen as a necessity. Crypto emerged among libertarians averse to government intervention; Many proclaimed blockchain technology resistant to “censorship” and other forms of control. However, the bulk of the funding now comes from venture capital and banks, which believe regulation will boost crypto valuations. Given the size of the $1 trillion token market and economic interests in crypto from Wall Street to Silicon Valley, oversight is inevitable.

The industry has built a powerful lobbying force and is inundating pro-crypto candidates with posts. The Blockchain Association, a trade group, unveiled a new political action committee last week. Coinbase CEO Brian Armstrong also said last week that the company has “built crypto policy efforts right into our app,” including ratings for politicians on a crypto-friendliness scale. Though his political concerns extend beyond crypto, FTX founder Sam Bankman-Fried recently said he could spend $1 billion on the 2024 election.

The industry sees Congress as key to achieving favorable rules. That’s partly because legislation will likely be needed to settle perhaps the most contentious issue: which tokens should fall under SEC oversight.

SEC Chairman Gary Gensler, who has initiated multiple enforcement actions against crypto companies, said in a Senate banking sector hearing on Thursday that he believes the “vast majority” of tokens are securities under the agency’s jurisdiction and that Exchanges should be registered.

But charging the SEC with crypto is far from a done deal. The Senate Agriculture Committee is considering a bill that would put most crypto under the oversight of the CFTC, which sees the industry as a lighter regulator. Crypto supporters this week begged the committee to add provisions to the law that would define most cryptos as commodities, stripping the SEC of much of its enforcement and rulemaking power.

With midterm elections approaching in November, the bill has little time to go into effect this year. But the industry believes it could move forward in 2023, no matter which party controls Congress. “The authorities have done everything they could, and we really need Congress to step in,” said Kristin Smith, executive director of the Blockchain Association.

As regulatory dynamics build, investors in crypto stocks have more immediate concerns. Bitcoin is trading just below $20,000, down 72% from its November high. Mining companies may be less concerned about a ban on their operations than they are about staying afloat amid a long crypto winter that has wiped out profits and brought some miners to the brink of bankruptcy.

The stock markets are also ailing. Coinbase stock is down 70% this year. “The biggest fear for Coinbase isn’t regulation, it’s natural causes of death: fee cuts, over-hiring, and less-engaged investors being burned and discouraged from playing again,” said Dan Dolev, an analyst at Mizuho Securities.

For now, the industry may just be hoping to weather this downturn while convincing Congress to protect it from a wave of regulation the White House is trying to craft.

write to Joe Light at joe.light@barrons.com

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