Donald Trump may be crypto’s unexpected savior

Since leaving office, Donald Trump has invested in crypto and issued his own non-fungible token, or NFT. | Reba Saldanha/AP

By Jasper Goodman

01/08/2024 05:00 AM EST

The cryptocurrency industry has spent the Biden era in a losing battle with Washington. If Republicans take power in 2024, it can still win the war.

Donald Trump derided crypto during his presidency, but if he returns to the White House he is expected to usher in policy and personnel that would be more aligned with digital asset firms. GOP lawmakers and conservative groups have drafted regulatory proposals in line with the industry’s wish list, and Republicans are already floating the names of potential regulators who would play a key role in turning the tide.

It would mark a major shift from President Joe Biden, whose administration and regulators are consistently taking a skeptical approach to crypto over what they see as risks to consumers and the broader financial system. Leading Democrats in Congress, including Senate Banking Chair Sherrod Brown of Ohio and Sen. Elizabeth Warren of Massachusetts, are likewise ramping up scrutiny. The crypto lobby in response is fighting back hard against policies designed to rein in the industry, including in court.

How Elizabeth Warren is making Hamas crypto’s latest Washington woe

Senate Banking Chair Sherrod Brown (D-Ohio) — one of the industry’s fiercest critics — is vowing to use his committee to examine the role crypto played in the Israel attacks. The Hamas connection is also giving fresh momentum to a push by Warren to pass a bill that would impose new anti-money laundering rules on crypto — an increasingly bipartisan effort that digital asset firms have tried to quash.

“The danger of crypto-financed terrorism is real and should be an urgent priority for Congress,” Warren said in an interview. “There’s a growing bipartisan coalition of senators who are committed to passing this bill and fighting back against terrorism worldwide by choking off the financing.”

While crypto’s use by Israel’s attackers is still being understood, the linkage is shaping up to be the latest in a series of political liabilities incurred since last year’s market meltdown and arrest of Bankman-Fried. The crypto lobby has made some recent strides in its quest for legitimacy — the House is on the cusp of passing industry-blessed legislation — but is facing growing resistance from lawmakers energized by digital currency’s role in financial crimes.

“From a crypto skeptic’s perspective, right now, it’s the most potent argument that they have,” said Lee Reiners, a fellow at Duke University. “This is sort of another black eye for crypto.”

Hamas was an early adopter of using cryptocurrencies for financing, according to TRM Labs, a blockchain intelligence company. Though most of the group’s funding comes from other sources, groups linked to Hamas have continued to solicit donations through crypto since its weekend attacks, per TRM.

Crypto is seen as a potential tool in financial crimes because it allows individuals to move money outside the traditional banking system with pseudo-anonymity and the use of decentralized platforms. Crypto advocates counter that it offers enhanced transparency because transactions are often recorded in public ledgers. Law enforcement has found ways to follow the money.

Digital wallets linked to Hamas and Palestinian Islamic Jihad received up to $134 million since 2021, according to crypto analyses cited by the Wall Street Journal. (Warren this week shared the WSJ’s reporting with other senators and encouraged them to back her bill.)

Crypto firms including the U.S. exchange Coinbase have rushed to get ahead of the controversy. Sheila Warren, CEO of the Crypto Council for Innovation, wrote on X Thursday that she has “moved from disgust to anger that crypto’s detractors in Washington are using this horrifying moment to push their (overblown) political [points].”

Brown’s decision to dig into crypto financing could be a boon to Senator Warren, after he previously downplayed the need for her legislation. Her bill would extend financial crime rules for traditional lenders to players in the digital asset space.

“The abuse of crypto by terrorist organizations should serve as a wake-up call to Congress to crack down on digital assets and money laundering that we now know is helping bankroll the horrific massacres in Israel,” said Sen. Roger Marshall of Kansas, the lead Republican on Warren’s bill.

Industry groups have been gearing up to fight Warren’s plan. Blockchain Association CEO Kristin Smith said the industry has a history of working with law enforcement.

“Unfortunately, Sen. Warren’s bill would do nothing to stop bad actors from abusing this technology,” Smith said. “Instead, it would create an unfeasible new regime that law-abiding American companies simply can’t satisfy, forcing crypto activity into unreachable, unregulated venues and jurisdictions.”

Rep. Jim Himes (D-Conn.), who sits on the House Financial Services and Intelligence committees, said the latest controversy underscores why crypto advocates need to better “articulate what their use case is.”

“As long as the use case is some weird combination of libertarian fantasies and drug dealers and terrorists, members of Congress are not going to be excited to give the industry the benefit of the doubt,” he said.

How SBF’s fall keeps rattling Capitol Hill

The House is preparing to vote on landmark bills that would set up regulations blessed by the industry. At the same time, lobbyists are trying to fend off a push by Sen. Elizabeth Warren (D-Mass.) and a growing list of crypto skeptics who want to crack down on financial crimes that use digital currency.

How it all shakes out may be impacted by Bankman-Fried’s trial, where Washington’s former go-to crypto magnate and a major source of campaign cash will fight charges that he orchestrated one of the largest financial frauds in U.S. history at the helm of his FTX exchange.

“If you’re not familiar with the crypto industry — and this is the first time you’re thinking about it — your impression is certainly not a positive one,” said Blockchain Association CEO Kristin Smith, whose group is a leading crypto trade organization. “He was a terrible ambassador for our industry.”

The coming split-screen will test crypto’s lobbying influence after it spent much of last year trying to rehabilitate the industry’s image. Advocates have framed Bankman-Fried as an outlier whose alleged misdeeds could have happened in any corner of finance. But it’s a distinction that may not matter to lawmakers who have been on the fence, with many already going out of their way to distance themselves from the fraud and consumer protection concerns that have been front of mind since Bankman-Fried’s arrest in November.

“Sam Bankman-Fried’s trial will remind everyone in Congress about the risks that an unregulated crypto industry poses for all of our constituents, for our economy and for international stability,” Warren said in an interview.

A year ago, Bankman-Fried was a force in Washington. He showered lawmakers with campaign contributions — at one point pledging to spend $1 billion through the 2024 election — and became a familiar face on Capitol Hill. He was able to get meetings with regulators at the highest levels, after recruiting former top officials to help FTX navigate agencies and Congress.

Then his empire collapsed, and with it crypto’s broader Washington influence operation.

The 31-year-old — now in jail — faces a slate of criminal fraud and conspiracy charges. Prosecutors allege that Bankman-Fried used $100 million in stolen FTX deposits to fund a massive political operation. He has pleaded not guilty.

In the aftermath of FTX’s collapse, prices in the crypto market tumbled and a slew of other digital asset firms imploded. Lawmakers gave up donations from Bankman-Fried. Crypto-friendly legislation — including a bill he championed to revamp regulations — effectively died.

But crypto has seen a comeback in the last few months. House Republicans have approved bills that would set up a regulatory regime that digital asset firms have long sought. The bills would curb the reach of the Securities and Exchange Commission, an agency that’s facing off with the biggest exchanges and token providers in court. The proposals would also boost the growth of so-called stablecoins used in payments.

In key respects, the end result of the House Republican legislation would resemble policy that Bankman-Fried had championed. The SEC would take a backseat to the Commodity Futures Trading Commission, a smaller agency that’s historically played less of a role in regulating consumer-facing financial products.

The proposals would codify in law for the first time explicit actions regulators must take to police digital asset trading. At this moment, the agencies are operating in the crypto space using authority drafted for traditional financial markets, including stock trading and futures contracts.

Critics counter that the House plan would potentially weaken industry oversight rather than improve it.

“The end goal is the same,” said Lee Reiners, a lecturing fellow at the Duke Financial Economics Center. “The industry’s been pretty successful in preventing the [House GOP bill] from being tarred with any association to Sam.”

Republican lawmakers are trying to brush off the SBF baggage before House floor votes this fall, but some see a potential challenge ahead.

Rep. Bill Huizenga, a senior Michigan Republican who’s helping shepherd the bills, said he thinks more Democrats would be supporting the legislation if not for Bankman-Fried’s downfall.

“That flame burned pretty close and hot next to a number of them,” he said, referring to the millions of dollars Bankman-Fried spent to back Democrats. It “is not unexpected to have them step back from their enthusiasm.”

Rep. Jim Himes of Connecticut, among the few Democrats who support the House bills, said he warned crypto lobbyists last week that they have a “fundamental problem in this space.”

“I hear all these promises, but I say, ‘How is this going to change the neighborhood in St. Louis, or the state of Connecticut, or the United States?’” he said. “To the average member, [they see] $2 trillion lost over time.”

House Republicans argue that the failure of FTX should compel more lawmakers to back their legislation.

Rep. Andy Barr (R-Ky.), a senior member of the committee that drafted the bills, said Bankman-Fried is “exhibit A” for why Congress needs to act on the House legislation.

“Reminding everybody about the bad behavior of some market participants will help us make the case for why some basic rules of the road are necessary,” said Rep. Dusty Johnson (R-S.D.), who chairs a digital asset subcommittee.

But in the Senate, crypto critics are on the rise and betting that a re-tread of the FTX and Bankman-Fried calamity will help grow their ranks.

Warren has a bipartisan group of 15 senators on her bill that would impose new anti-money laundering rules on digital asset trading. She said the trial will strengthen the case for her legislation.

“The deep skepticism about crypto is even deeper with his arrest,” Senate Banking Chair Sherrod Brown (D-Ohio) said in an interview. “All of these things contribute to the deep skepticism that the public has about crypto and how some pretty unscrupulous people are using it for some very unscrupulous purposes.”

Crypto court victory reignites power struggle with Gensler’s SEC

“What Ripple did is mark the end of a stage in crypto [of] this idea that the SEC could by itself resolve the hard questions of crypto,” said Justin Slaughter, a former SEC and CFTC official. | Getty Images

By Declan Harty

07/14/2023 01:43 PM EDT

07/15/2023 02:44 PM EDT

A crypto company’s surprise win in federal court over the Securities and Exchange Commission is giving the industry new hope that it can curb SEC Chair Gary Gensler’s power over the $1 trillion market.

Judge Analisa Torres in New York ruled Thursday that Ripple Labs did not violate U.S. securities laws in $1.4 billion in sales and distributions of its XRP token — a decision that has spurred executives, lobbyists and industry allies in Congress to try to seize momentum on the future of crypto regulation back from the SEC.

Lawmakers like Reps. Tom Emmer (R-Minn.) and Ritchie Torres (D-N.Y.), two of Capitol Hill’s most fervent crypto supporters, say the decision underscores the need for Congress to draft new rules, despite Gensler’s insistence that he has the authority to regulate the industry. Executives say the ruling could hinder enforcement actions underway at the agency. And other crypto companies may use it as a basis to resist SEC efforts to get them to register their tokens as securities, which would subject them to stricter scrutiny.