The Political “Techlash” Against Web3: How the Industry is Finally Fighting Back

Source: Intelligencer

Since the beginning of the year, there’s been an incredible level of regulatory pushback in the US against the Crypto industry. The U.S. Securities and Exchange Commission (SEC) has sued responsibly run major exchanges like Coinbase and Kraken and more recently also industry leader Binance. The Commodity Futures Trading Commission has also brought charges against Crypto behemoth Binance for allegedly knowingly offering unregistered Crypto derivatives products in the U.S. Meanwhile, in Congress, Democratic Sen. Elizabeth Warren of Massachusetts and her “anti-crypto army” seem for all intents and purposes to be working on legislation to stifle the growth of the industry at least in America. Looking at the implications of this backdrop and the devastating impact it has already had on token prices (with more potential negative moves to come), it’s definitely hard to be positive in the short term.

Today, I would like to explain how this kind of “techlash” isn’t anything new. It happens every time a disruptive technology threatens entrenched interests. We saw it in the early 1800s when Luddites smashed mechanised looms they thought would threaten their jobs.

Source: CBS News, The Luddites

We saw it at the turn of the 20th century against the automobile, when some cities passed “red flag” laws that required a person to walk in front of “horseless carriages” waving a red flag.

Source: Look and Learn, Early Car, with Man with a Red Flag

Today, we see it as politicians call for greater regulation of social media companies like Alphabet, Meta, and TikTok. What happened in every one of these earlier cases was that eventually, those new industries created interest groups that fought on their behalf and helped paved the way for mass adoption. I will explain why we will see the same thing happen in the Web3 industry despite the seemingly enormous challenges from the US authorities today.

Taking the Political Fight to Washington

In April, the Consensus 2023 conference took place in Austin, Texas. Consensus is one of the world’s largest, longest-running, and most influential gatherings of the Crypto and Web3 communities. There’s always some major announcement coming out of the event. One of the biggest came from Franklin Templeton. It’s a 75-year-old global investment firm with $1.4 trillion in assets under management. At Consensus, it announced it will launch the first U.S.-registered mutual fund to use the blockchain to process transactions. Other major announcements came from global investment firm KKR and global ETF issuer WisdomTree. Both are traditional Wall Street titans with billions of dollars’ worth of assets under management. And both are launching new products on the blockchain. The key takeaway here is that even after a year of terrible news in the Cryptosphere, institutional money is still looking to use this superior technology and generally gain exposure to its seismic growth potential.

But given the recent seemingly never-ending negative regulatory actions emanating from the US, what may be being overlooked is what is happening on the political side to fight back: one of the biggest advocates of building a Web3 lobbying effort is Ryan Selkis, the CEO of popular Crypto data and research company Messari. Selkis is also a founder of the Blockchain Association (BA). The group includes big-name members such as Ripple, Genesis, Dapper, Digital Currency Group, Kraken, and Circle.

Late last year, the association announced it will launch a political action committee (PAC). By its nature, Crypto is non-partisan. So the PAC will endorse political candidates across the spectrum who support Crypto. In the past, Selkis said he’s seeking to raise $100 million for the PAC. At Consensus, he reaffirmed his goal to build a political war chest. Last year the Crypto industry spent nearly $22 million on federal lobbying, according to the website OpenSecrets. To put that in context, the Crypto industry’s current outlay is less than 10% of the $372 million spent last year by the pharmaceutical lobby — the single biggest lobbyist.

Crypto’s $22m lobbying spend is not peanuts: it is nearly half of what commercial banks spent on lobbying, and more than twice as much as what both the hotel and restaurant lobbies spent…..

Source: Open Secrets

….If Selkis reaches his goal of $100 million, that would make Web3 one of the most well-financed lobbying efforts in Washington.

This isn’t Selkis’ first foray into politics. In 2021, he announced he’ll challenge Democratic Sen. Chris Murphy of Connecticut for his U.S. Senate seat in 2024. Another Web3 entrepreneur who has hinted he may throw his hat into the political arena is Mike Dudas, the former CEO and founder of Crypto publication The Block. To be clear, if they run, both Selkis and Dudas would be long shots to win political office. Instead, their campaigns are issue-driven. They want to raise the profile of the Web3 community on Capitol Hill.

Nearly two-thirds of the Crypto industry’s 278 lobbyists are Washington insiders, including former members of Congress… both Democrats and Republicans. While the Web3 community is raising funds and enlisting former politicians to take on D.C., it’s also creating a new grassroots movement. One that can become a single-issue voting bloc….

In politics, even small single-issue voting blocs are powerful — especially in what will probably be a very tight election race, and especially when the single-voting issue voters are as passionate as Crypto enthusiasts tend to be!

A New Crypto Grassroots Movement

Today, a quarter of US households and more than 400 million people globally have exposure to Crypto. But according to a former Goldman Sachs fund manager, that number will be 5 billion people by 2030 — over half the entire global population. Many of these users will come from the millennial (ages 27–42) and Gen Z (ages 11–26) demographics. They’ll account for two-thirds of the U.S. workforce by 2030, according to the Department of Labor. And my sense is that they will increasingly see Crypto as a voting issue….

Here’s why that’s so important politically…

Crypto exchange Bitget recently surveyed nearly 255,000 adults from 26 countries. And it found that Gen Z is the age group most likely to care about Crypto regulations while voting for political candidates. According to the survey, 36% of Gen Z respondents said they saw promises regarding Crypto as an important factor in elections. Gen Z was followed closely by millennials at 27%.

Source: Bitget

Another survey conducted by Global Strategy Group and Fabrizio, Lee & Associates, found that 44% of voters across the U.S. could be described as “Crypto voters” — those who own or are considering owning digital assets. A subset of 17% of those voters already own Crypto, which is “an extremely competitive group of voters that both Democrats and Republicans have been pitching in recent elections,” the poll conductors said in a statement.

This younger cohort of Crypto users may well coalesce into a grassroots movement. Politicians won’t be able to disenfranchise a group — not only that large but one that’s likely to grow as a proportion of voters — and expect to maintain political power.

Reasons to be Hopeful

Blood on the Streets Moment?

Famous investors have often advised that life changing returns are really only possible when there is “blood on the street”, i.e. prices are in freefall, and the news is exceptionally negative. I believe we are at such a moment in the Crypto sector. What’s more the mainstream press is extremely negative and time and again, we have seen that when esteemed publications like the Economist (December 2022) and Bloomberg (November 2022) put out bearish opinions, it’s one of the most reliable buying indicators! The recent opinions expressed in the mainstream media on the prospects of the Crypto industry could not be more negative…

A Global Industry: Other Countries Will Take Crypto Business from the US

The US has dominated technology for decades and its leadership has translated into superior economic might while other countries looked on in envy. The US’s strangely unwelcoming approach to the blockchain industry has therefore been met with a diametrically different (more welcoming) approach by a number of other countries! We’ve seen Asia and places like Europe and the UK in particular seek to grab Crypto market share and talent from the US. They are doing this by establishing a more welcoming and clear regulatory framework.

Source: Coindesk

And the titans of both the Crypto and the technology industry in general are voting with their feet and moving to more favourable jurisdictions. The biggest shock is the recent announcement by Tech Behemoth Andreesen Horowitz (who recently raised a $4.5bn Crypto investment fund) to establish a presence in the UK!

Here is UK Prime Minister, Rishi Sunak, making a statement on Andreesen Horowitz’s expansion to the UK:

“As we cement the UK’s place as a science and tech superpower, we must embrace new innovations like Web3, powered by blockchain technology, which will enable start-ups to flourish here and grow the economy.

“That success is founded on having the right regulation and guardrails in place to protect consumers and foster innovation. While there’s still work to do, I’m determined to unlock opportunities for this technology and turn the UK into the world’s Web3 centre.

“That’s why I am thrilled world-leading investor, Andreessen Horowitz, has decided to open their first international office in the UK — which is testament to our world-class universities and talent and our strong competitive business environment.”

Other examples include Singapore-based banks launching their own crypto division to facilitate access to banking services for Crypto businesses and Hong Kong’s Monetary Authority nudging banks to help Crypto companies to set up accounts.

All these moves in other countries to help build and attract the Crypto industry is in stark contrast to the US approach where even the industry’s banking solutions are being removed. What all this means is that the Crypto industry is more immune to the vagaries of the actions of the US authorities than at first seems to be the case! Other countries are stepping into the breach and Crypto companies are going where they are welcome!

Light at the End of the Tunnel — Even in the US?

Some of the Crypto industry’s lobbying efforts are paying off already. For example, Crypto supporters in Congress were able to kill a proposed Digital Asset Mining Energy excise tax during the recent debt ceiling negotiations. The bill would’ve imposed a 30% tax on crypto mining firms. And in Texas, a bill that would have eliminated energy credits to bitcoin miners also failed last week.

I believe their lobbying efforts and the grassroots movement they’re building will eventually turn the tide against the anti-crypto sentiment coming out of Washington. These guys would rather code and develop great networks than spend money on lobbying. But they realise they’re in an existential fight to keep Web3 surviving and thriving in the United States.

What is also to me entirely possible is that the growing realisation in the US that they are giving away their lead in Crypto — the latest world-changing technology to emerge — means that they pivot to a less negative approach!

Final Thoughts

Given the recent crash in Crypto prices, it’s normal for investors to be concerned about the continuing negative impact of the “techlash” against Crypto and Web3, at least in the US. But as history shows, we’ve seen this before with other disruptive technologies: the initial backlash was always very temporary and in each case, didn’t in fact stop the superior technology from gaining mass adoption… So it’s no surprise that Web3 is undergoing its own techlash moment but I don’t believe the impact will actually ultimately dim the transformative potential of the technology.

As regular readers know, we absolutely welcome clarity on the regularity rules and are convinced that new regulation would benefit the Web3 industry. After the FTX and Celsius debacles, there’s a definite need for rules to protect consumers from fraud. But the industry wants regulators to clamp down on bad actors like FTX and others who scam the public. Sadly, what is happening in the US instead is that the enforcement actions by the SEC against a backdrop of no regulation is stifling this asset class and chasing it offshore. Many Americans including industry veterans like Ryan Selkis and Mike Dudas want to see blockchain survive and thrive in the United States, so that leadership in this next generation technology — and the millions of skilled jobs that will be created in its growth — aren’t handed on a silver platter to more forward-looking countries. They want America to be at the forefront of this Web3 technological revolution — just like Silicon Valley was at the forefront of the Web2 movement. Therefore, not only do the industry’s prospects remain very bright internationally, but I believe political pressure will grow even in the US for a less negative stance towards the industry.

Time and again we have seen that once a better/cheaper/faster technology — in this case, the blockchain — comes along, there is very little that any one authority can do to prevent its mass adoption. In fact, today this is even more the case as blockchain is global and already not dependent on the US for its users or its base!

Once the mist clears, therefore, I believe that we will look back on recent events as marking a low point and a very attractive buying opportunity.

PTLIB is CIO of Dragonfly Asset Management.

DISCLAIMER: This content is for EDUCATIONAL AND ENTERTAINMENT PURPOSES ONLY and nothing contained in this blog should be construed as investment advice. Any reference to an investment’s past or potential performance is not, and should not be construed as, a recommendation or as a guarantee of any specific outcome or profit.