Regulation and Lobbying in the Crypto Industry Today
The cryptocurrency industry has been growing at a rapid pace with the market being valued at close to $2 trillion at the end of 2021, more than double the $900 billion it was worth at the end of 2020. The fast growth of the industry has raised important questions for legislators around the world. Increased adoption and trading of tokens shows that more people are being exposed to cryptocurrencies and blockchain every day. This inflow of investors does come with its own set of risks as less informed consumers seek protection from fraud. Political pressure has also forced governments across the world to reconsider their positions on cryptocurrencies and the industry as a whole.
The US government took a step towards regulation by passing the Infrastructure Bill in late November 2021. The bill included new provisions for regulatory reporting for brokers and exchanges and aims to tax the market as a whole. The new requirements expand on the definition of a digital broker ( i.e. exchanges) and define digital assets. The bill also imposes stricter reporting requirements for transfers and transactions, such as 1099 and 8300 reporting for large transactions in digital assets (> $10000).
These regulations mainly target and require more diligence from platforms and exchanges as a part of the government’s push towards transparency. For example, as brokers and other businesses now need to report large payments, they are required to “collect a certified tax ID” from buyers which is now a more rigorous process than before. Such rules impose heavy short-term costs on firms in the space as they now need to change internal software and rules in order to not get penalized. The bill seems beneficial for both investors and the market as a whole as it promotes clarity and transparency within the industry. Furthermore, it makes the use of such currencies for illegitimate purposes more challenging which may incentivize investors that were previously on the fence to enter the market. However, it is possible that the bill may turn away businesses and consumers that banked on low regulation for the ease of investment into the industry.
Not all legislation passed recently has limited the potential of the industry. Early last month (March 2022), President Biden signed an executive order pushing federal agencies to research the benefits and risks of cryptocurrencies. Biden emphasized six main areas of focus: consumer protection, financial stability, illicit activity, U.S. competitiveness, financial inclusion and responsible innovation. A federal focus on these issues is likely to bring in new investors and improve the relationship between the industry and the government, as the order is a sign that the government is considering options other than just regulation. This is exemplified by a positive market response as Bitcoin rose past $42,000 after the announcement.
An increase in federal focus on the industry has also prompted firms to bolster their lobbying efforts in legislatures across the country. Companies and other stakeholders have been making inroads in states like New York, Florida, Wyoming, Illinois and more. In Florida this March, for example, House members thanked the industry stakeholders who helped draft HB:273. This bill made crypto trading easier in the state by eliminating licensing requirements for individuals trading crypto. The situation in Illinois is even more apparent as a pending bill “lifted entire sentences from a draft provided by a lobbyist”. This trend is not uncommon and indicates that firms in the industry are able to influence policy decisions–at least at the state level–through lobbying and other expenditures.
Ultimately, the growth of the industry suggests a need for revisiting existing regulation to streamline the market, ensure stability, and protect consumers and investors. Recently, increased profits have allowed firms and exchanges to invest in lobbying efforts which they were previously not able to. Thus, they are now able to influence policy decisions across the country. I predict that while the government will propose additional regulations, increased lobbying power will ensure that they will be favorable towards the crypto industry.
