Cryptocurrencies are no longer a quasi-legal backwater. After permitting the “digital asset” industry to exist in the regulatory shadows for years, regulators are finally turning their attention to crypto and associated items like NFTs. The decisions they make in the coming months could launch the crypto industry to new heights … or bring it crashing down to Earth. With the stakes so high, crypto is pouring money into D.C.’s influence machine to get its preferred outcome. In particular, the industry is snatching up officials from the Beltway’s revolving door nearly as quickly as it turns them out.
President Biden’s recent executive order on cryptocurrency, which surprised many with its uncharacteristically friendly tone, suggests that the industry’s investment is paying off. As regulators begin adding the essential details to the outline the White House put forward, crypto is likely to keep the money taps open in the hopes of buying its preferred regulatory regime. If not countered, this naked political influence-peddling risks undermining public trust in the rules regulators develop, if not sowing the seeds for a future financial crisis.
Fortunately, Biden has the means to stop at least one aspect of crypto’s campaign in its tracks. Through an executive order, he can cut off crypto’s access to the revolving door by barring the officials who are involved in developing regulations for the digital assets industry from working for it for at least four years. By rights, it should be a bare-minimum anti-corruption standard.
The executive order, which aims to ensure responsible development of the digital assets industry, has six major policy objectives: consumer, investor, and business protection; mitigation of systemic risk and protection of domestic and global financial stability; mitigation of illicit finance and national-security risks; promotion of U.S. leadership in the global financial system and in technological and economic competitiveness; provision of equitable access to financial services; and support of potential technological advances, in addition to exploration of a central bank digital currency (CBDC).
To achieve these objectives, the executive order directs various departments, agencies, and bureaus to produce assessments, reports, and proposals on each area of focus within 90 to 210 days. The assistant to the president for national-security affairs and the assistant to the president for economic policy are tasked with coordinating the executive branch’s implementation of the order through an interagency process. The process calls on the secretaries of the Treasury, State, Energy, Commerce, Homeland Security, Labor, and Defense Departments to work with the attorney general and representatives of independent financial regulatory agencies, including the Federal Reserve, Securities and Exchange Commission, Commodity Futures Trading Commission, Federal Trade Commission, Consumer Financial Protection Bureau, and Federal Deposit Insurance Corporation.
On the issue of risks and opportunities to consumers, investors, and businesses, the Treasury secretary is expected to develop a report in consultation with various departments and regulators. The Treasury secretary is also responsible for convening the Financial Stability Oversight Council (FSOC) to outline “specific financial stability risks and regulatory gaps” and “provid[e] recommendations to address such risks.” This is especially notable since FSOC has authority to define and determine supervision and regulation of systemically important financial institutions. The order also directs the secretary of commerce to establish a framework for U.S. competitiveness, a likely win for the industry considering Gina Raimondo’s history of prioritizing private profits over the public interest.
While calls for increased supervision of crypto are appreciated, the order fails to address one key question: What problem does this so-called innovative technology solve? Despite being around for well over a decade, the crypto industry has failed to offer products of much value beyond speculation or evasions of financial law. Many times, these speculative products are designed to skirt existing regulations and laws—“pump and dump” or “wash trading” or “rug pull” schemes that would be illegal in normal financial markets (and are arguably illegal right now; see below) are simply rampant in the space, and often carried out in the open. The amount of shady crypto speculation, as well as the routine eye-popping losses to hackers, limits crypto assets’ potential for offering any kind of financial service.
Further, as Securities and Exchange Commission Chair Gary Gensler has repeatedly mentioned, most crypto assets are unregistered securities. Hence, existing crypto exchanges that offer these assets are in violation of securities laws. Aware of this reality, industry players have led a charm offensive in Congress seeking to enshrine the Commodity Futures Trading Commission (which is definitively not the primary securities regulator) as the industry’s principal overseer. It’s disappointing to see the administration embrace an industry that is actively disobeying long-standing laws and regulations.
Despite the tone of the executive order, it was not too long ago that crypto was panicking about the prospect of a Biden presidency. Worried about the prospect of increased oversight, crypto quickly began working to secure the next best thing: a regulatory system tailored to the industry’s exact specifications.
Crypto prides itself on being revolutionary, but when it comes to influencing Washington, it is sticking with old-fashioned sacks of fiat currency. In 2021, crypto more than doubled its lobbying expenditures compared to the year before, hoping to leave its mark on new legislation and executive branch action. Last year, industry insiders also donated over $7 million to candidates and political action committees (the vast majority in old-fashioned dollars, not crypto, ironically).
The industry’s most notable investment, however, might be in D.C.’s revolving door. There, both the volume and prestige of crypto’s hires stand out. The Tech Transparency Project (TTP) recently identified over 200 former lawmakers, regulators, and congressional and White House staffers who have moved between public service and the industry. Seventy-eight went to or from “government agencies that directly regulate the financial sector and companies involved in crypto.” The hires include big names, like former Treasury Secretary Larry Summers, who sits on the board of financial services firm Block; former Securities and Exchange Commissioner Mary Jo White, who is defending Ripple against her former agency; and many more who once held some of the federal government’s most powerful financial regulatory positions. This revolving door has been picking up speed; TTP notes, “Most of the moves have occurred in just the last two years.”
It’s no mystery what the industry hopes to get from these hires. As crypto lobbyist Izzy Klein explained to Politico in 2019, these “legitimate voices” are particularly critical “when you have a new technology and new platforms in older and heavily regulated spaces.” In addition to a general air of legitimacy, former government officials bring considerable substantive knowledge about their former employers and personal relationships that can help make their current employers’ lobbying more effective. More subtly, the prospect of a lucrative landing spot in the crypto industry has the potential to distort current regulators’ and enforcers’ incentives to act against the industry’s preferences while in public service. All this may not be illegal, but it is virtually the dictionary definition of corruption.
If the recent executive order’s friendly tone is any indication, it would appear that the industry’s investments are already paying off. But the real fight is still ahead. Over the coming months, financial regulators will be getting into the critical details of how they plan to treat the crypto industry. As OpenSecrets’ Dan Auble told The Wall Street Journal, what they do now could “make or break the industry.” With such existential stakes, crypto’s campaign to buy this process is only set to grow more opulent.
This show of force risks undermining public trust in whatever regulatory framework policymakers eventually establish, and allowing absurdly crooked crypto shenanigans to continue. Headlines noting the industry’s record-breaking spending on lobbying, political donations, and lavish salaries for former regulators turned industry spokespeople—especially when paired with recent evidence of its efficacy—will make it all but impossible to believe that the public interest is guiding current regulators and enforcers as they erect new guardrails.
President Biden shouldn’t ignore this threat. To give the public reason to trust in his administration’s actions, he must immediately move to undercut this conspicuous display of political influence. And although some aspects of crypto’s campaign—like lobbying and political spending—are largely outside of his reach, he does have the power to shut and lock the revolving door from his administration to the crypto industry.
All it would take is an executive order that institutes a new ethics pledge for administration officials who helped develop the executive order on cryptocurrency or had any involvement in implementing its recommendations. As a condition of their continuing employment, these officials could be asked to agree not to accept jobs in the crypto industry or with any institution that gets the majority of its funding from the industry (e.g., crypto-funded think tanks or trade associations) for a specified period of time (we would propose at least four years). For the sake of transparency and accountability, the executive order would also need to stipulate that the names of those who are covered be publicly disclosed.
With this simple move, the Biden administration could cut off the crypto industry’s access to the most up-to-date, inside knowledge of the federal government’s crypto-related deliberations—and their most effective way to promise massive rewards to any official who does their bidding. To give a concrete example, an executive order in this vein could have prevented the frankly scandalous spectacle of FinCEN’s chief digital currency adviser leaving for a crypto firm, at a moment when the industry is under fire for potentially helping Russian oligarchs evade sanctions. More importantly, this pledge would ensure that those who are working on crypto policy have the public interest, not the prospect of a lavish salary in the industry, as their guiding star.
And in the unlikely event that an official quits rather than sacrifice their right to future crypto employment, it would be hard to argue that the public is worse off without that official as an advocate.