Explained: The battle for crypto regulation in the US

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Two distinct camps have emerged in the battle for crypto regulation in the US, with one camp strongly in favor of tight regulation and the other being an openly pro-crypto faction. Compared to the EU, however, there’s a long way to go.

On March 9, President Joe Biden kickstarted the race to legislate crypto in the US with an executive order (EO). It asked US federal government agencies to prepare an international framework of regulation on digital assets, to be adopted in conjunction with foreign counterparts. The unusually long EO lists several specific priorities, including stablecoins, central bank digital currencies (CBDC)s, consumer protection, criminal and illicit activity, and international cooperation for enforcement.

Biden’s EO makes it explicitly clear that the US intends to be the global leader in the legislative and enforcement network for crypto – but the EU is already pushing forward a comprehensive regulatory framework in its parliament, called MiCA, that’s already sorted out some of the pricklier points that have both camps in the US clashing.

The biggest debate surrounding crypto regulation in Europe concerns the environmental impacts of crypto-mining. MiCA stops short of introducing a mining ban, but the EU’s Parliamentary Economic and Monetary Committee added a clause that crypto-miners must disclose energy consumption and that exchanges have to present energy usage for the significant cryptocurrencies it lists.

Following this official addition, the environmental debate in Europe on crypto regulation seems to have been settled, at least for now. In the US, it remains one of the biggest points of contention.

The crypto critics camp, led by Senator Warren

Democratic senator Elizabeth Warren leads the crypto critics camp and is making a push for strong environmental regulations and consumer protection.

Last year, Warren said that the crypto market is a wild-west and an environmental disaster. In a recent interview with NBC, Warren argued that Bitcoin is only a speculative instrument with no utility, and that we need to make sure it’s not used by rogue and criminal elements.

Warren is also concerned for small investors. She’s previously called for a clampdown on DeFi and stablecoins, calling them a risk to the consumer and the economy. The senator criticized Fidelity for offering bitcoin to its customers in their 401Ks.

Warren does concede that cryptocurrencies can be beneficial for providing increased financial services to people who are unbanked, but she would prefer to see this happening through a CBDC.

NBC interviewed Senator Warren in April regarding crypto regulation.

Despite Warren’s misgivings about Bitcoin, she’s not campaigning to ban it. Warren has marked her career fighting for consumer rights and she is in fact known to be one of the proponents behind the government’s Consumer Financial Protection Bureau (CFPB), which President Obama tasked her to form.

The CFB enforced increased transparency and disclosure obligations to consumers by credit and banking institutions while introducing restricting provisions such as disallowing arbitrary charges.

Yet, Warren will likely battle for environmental regulation, given that in terms of consumer rights, there’s unanimous agreement that increased regulation is needed.

Last week, Warren sent a letter to the US Environmental Protection Agency and the Department of Energy urging them to require crypto mining operations to report their energy usage. This would allow the government to properly understand how much energy miners are using and hopefully regulate the industry.

Critics were quick to respond with videos of Warren descending the steps of a private jet, while some influencers are rallying their support for bitcoin miners. However, the market didn’t move on the news, and barely anything was heard from miners themselves.

A day following Warren’s letter, FTX chief Sam Bankman-Fried posted a long thread on Twitter outlying what he called “crypto’s potential use-cases.” According to him, these are:

the ability to transfer money online without an intermediary at any time and with minimal fees,
tokenizing traditional financial assets such as equities to avoid broker intermediaries,
and the use case of decentralizing social media (which was rather vague and ambiguous compared to the previous two).

Pro-crypto proponents want less regulation than the EU

The pro-crypto camp in the US is also proposing regulation, although not as comprehensive as MiCA in the EU. On June 7, senators Kirstin Gillibrand (Democrat) and Cynthia Lummis (Republican), both funded by the crypto-industry and Sam Bankman-Fried himself, published a bipartisan bill on crypto which includes similar proposals to MiCA, especially with regards to stablecoins and transparency obligations by exchanges, although with some caveats and differences.

The bill includes the same EU obligation to brokers not to use client funds as collateral, although in Gillibrand’s and Lummis’ version of the law, clients can also opt out to be protected and may allow to have their funds played with. Like the EU’s proposals, the bill obliges stablecoin issuers to fully back their reserves with cash and treasuries, but leaves out clear and explicit EU provisions which put the responsibility on the stablecoin issuer to pay its claimants in case it suffers losses.

The pro-crypto Democratic Senators propose stablecoin issuers to have:

a master account with the Federal Reserve,
tax-free crypto lending arrangements in the same way as securities lending,
and tax crypto mining and staking activities on realized gains but not on unrealized gains.

Battle for US crypto regulation heats up

Pro-crypto lobbying has significantly ramped up the heat regarding the crypto regulation debate. In the EU, crypto firms funded lobbying efforts to stop lawmakers from introducing extra identity checks on cold wallets. The bill passed, but not without receiving harsh criticism from crypto execs like Coinbase chief Brian Armstrong.

Since 2018, spending on crypto lobbying in the US has quadrupled; so has the number of lobbyists pushing pro-crypto agendas. Last year, lobbying by crypto companies more than doubled to $9 million.

This year, more than $30 million has been pumped into pro-crypto campaigns so far, taking aim at Biden’s policies.

However, the Gillibrand-Lummis bill likely won’t go to a vote this year and while the contents of MiCA are mostly finalized, it’ll be at least two and a half years until it’s enforced.

The frameworks ordered in Biden’s EO will be due soon – the first few have already been presented. While it remains to be seen whether the US will regulate crypto like the EU, or with a few caveats, one thing is clear: cryptocurrency firms have already done enough to ensure that it’s here to stay.

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