Almost daily, Democratic policymakers are publicly voicing concerns about the digital asset industry, and in particular the cryptocurrency sector — indicating that the sector needs to show its value to the economy and poses the potential for financial risk, money laundering and tax evasion.
These criticisms highlight the deep skepticism the crypto industry faces from Democrats in Congress and make it clear that lawmakers are not buying into the notion that crypto is the future of finance. With the ghosts of the 2008 crisis ever present, Members on the left are especially reticent to embrace financial innovation that — whether fairly or not — is viewed as being largely unregulated.
That reality is already well-known by regulators at the Securities and Exchange Commission, Commodity Futures Trading Commission and elsewhere. Optimism among the digital assets industry that new SEC Chair Gary Gensler would be more open to crypto and other blockchain-based innovations because of his time teaching the topic at MIT has given way to the reality that political dynamics will be an obstacle to doing anything in this area (legislative or regulatory), particularly anything that could be interpreted as increasing access to cryptocurrency.
Until these dynamics change, regulatory developments on crypto will be likely limited to enforcement and consumer protection initiatives. Regulators will instead focus on implementing progressive policies with a hyper-focus on climate change, diversity and inclusion and other environment/social governance topics, enforcement and the rollback of Trump-era rules.
The crypto industry has made strides over the past few years in building its presence and credibility with policymakers, but there is clearly still a way to go with Democrats in particular. Achieving rational policy outcomes will depend in part on how industry leaders approach skeptical policymakers. With that in mind, there are a few steps that the industry can take to try to change the emerging narrative on crypto with Democrats:
- Give real-world examples. Highlight use cases that that enable financial inclusion and the democratization of finance. Opening up investment in Bitcoin through exchange-traded funds will likely not appeal to the left because it is viewed as making speculation easier. Instead, highlighting crypto projects that enable new business models and greater access to the financial system from underrepresented communities are great places to start.
- Support local pilot projects. Carry out pilot projects in the districts/states of members with an outsized voice in financial services. One way to get policymakers’ attention — and potentially their support — is to get their constituents’ involvement and buy-in. Finding opportunities to partner with universities, small businesses, and other local entities would not only help with adoption but may strengthen the industry’s ties to important constituencies outside of Wall Street, Silicon Valley and other traditional financial participants.
- Strive for political balance. A danger for the crypto industry is becoming overly politicized. Building relationships on both sides of the political aisle can help ensure that one party does not become reflexively dismissive of the industry. An important plank in this effort is telling crypto’s positive story, but in politics the messenger can be as important as the story. Crypto companies and industry groups should strive to ensure they have advocates and supporters with ties to both political parties.
- Address market integrity concerns. Policymakers have repeatedly highlighted their concerns about the susceptibility of the crypto spot markets to manipulation, fraud, and other related market abuses. The crypto industry could address these issues head on by working together to establish forums for information sharing and cross-market surveillance.
- Support common-sense regulation. Make regulation a feature, not a bug. Congress may eventually step in to provide more clarity in the space, but if the past is prologue, it will probably be after a significant market event where retail investors are harmed. In the absence of regulation, the industry’s continued efforts to develop best practices would likely be welcomed by regulators and investors alike.
The skeptics may never embrace the digital asset industry, but they should come to appreciate, sooner rather than later, that this innovative market has more to offer than speculation and price volatility. That, in and of itself, would be a victory and help smooth the path for rational policymaking in this space.
Ted Serafini is a senior director at Patomak Global Partners, where he specializes in advising clients on emerging financial regulatory issues. This op/ed originally appeard in Morning Consult and the op/ed can be found here.