As Vice President Kamala Harris’ campaign embraces crypto and former President Donald Trump puts a new collection of NFTs up for sale, the fight to regulate the crypto industry collides with a campaign season awash in industry money.
While Harris has yet to announce an official position on crypto, the emergence of groups like Crypto4Harris and the announcement that a prominent super PAC supporting Harris will accept crypto donations signal a shift in the Democratic approach to the growing sector.
In recent months, members of the party appear to have taken a less antagonistic stance toward cryptocurrencies, perhaps hoping to avoid a deluge of spending aimed at defeating Democrats in November. This shift in direction is also reflected in the bills circulating that aim to shape the future of cryptocurrency regulation in the United States.
Sens. Kirsten Gillibrand, D-N.Y., and Cynthia Lummis, R-Wyo., have introduced a bill that is widely seen as favorable to the cryptocurrency industry. The bill includes some changes to the tax code that would broadly benefit the industry. For example, the bill would tax mined cryptocurrencies at the point of sale rather than when the miner receives the cryptocurrencies.
Sen. Debbie Stabenow, a Democrat from Michigan, also has a bipartisan bill with Sen. John Boozman, a Republican from Arkansas, making its way through the Senate Agriculture, Nutrition and Forestry Committee. However, pressure for the bill died down in July. She has indicated she hopes to reintroduce it in September, though its fate is uncertain given the upcoming election season. She has also struggled to find the bipartisan support needed to pass the bill in the Senate.
Finally, the Financial Innovation and Technology Act for the 21st Century Act, often referred to as FIT21, appears to be the regulatory framework most likely to become law. The bill passed the House earlier this year with the support of 71 Democrats, and Senate Majority Leader Chuck Schumer, D-N.Y., has promised to bring it to the floor. The bill would include some regulations on cryptocurrency exchanges, such as requiring them to adhere to new record-keeping rules and meet Securities and Exchange Commission standards in this regard.
However, what all of these bills have in common is that they would regulate most cryptocurrencies under the Commodity Futures Trading Commission (CFTC), not the Securities and Exchange Commission (SEC). This has been a central point of contention in the cryptocurrency regulation debate, as SEC-regulated securities typically enjoy stricter oversight than commodities.
To put this in context, if cryptocurrencies are regulated as commodities, they will be subject to the same or similar rules that govern the trading of gold, crude oil, and agricultural commodities, as well as financial derivatives traded on these commodities, such as futures contracts. If cryptocurrencies are regulated as securities, they will be subject to the same or similar rules that govern stocks, bonds, and mutual funds, including transparency requirements.
Ladan Stewart, a former member of the SEC’s enforcement division who now works as a partner at White and Case, described the difference in how officials and the crypto industry view regulation.
“I think the SEC would tell you that as an investor, you should have full disclosure and transparency about what’s going on. What the crypto industry would tell you is that a lot of what the SEC does, including registration and disclosure requirements, don’t apply to crypto,” Stewart said.
Another reason the industry prefers CFTC regulation may be that the agency is much smaller than the SEC and has historically been less aggressive in its enforcement actions. The CFTC, in its current form, could also be an easier target for regulatory capture by the industry, depending on how it evolves after a bill is passed.
Stewart noted that the size of the CFTC is potentially subject to change, saying that “if they were given the mandate to regulate all of cryptocurrencies, maybe their funding would increase.” In 2022, for example, the SEC expanded its Cyber Unit by 66%.
The push by some Democrats to regulate cryptocurrencies as a commodity rather than a security also represents a departure from the direction President Joe Biden’s administration was taking earlier this year.
Gary Gensler, the current chairman of the SEC, wants cryptocurrencies to be regulated as securities and has had some success in doing so. According to him, “most cryptocurrencies are securities” and the industry is “rife with fraud, scams, bankruptcies and money laundering.”
One of the SEC’s goals was to get cryptocurrency exchanges to register as securities trading platforms, meaning they would have to adhere to the standards of more traditional financial entities.
“The crypto industry’s view is that these types of requirements that the SEC is imposing on things like stocks and bonds are not appropriate for crypto,” Stewart said.
The White House also said it opposed FIT21 and looked forward to working with Congress “to develop digital asset legislation that includes adequate safeguards for consumers and investors.” Biden, however, did not say he would veto the bill. It’s also worth noting that if no bill on the subject becomes law, the SEC will continue to be the governing authority. de facto cryptocurrency regulator, meaning SEC enforcement advocates may be less eager to support the legislation at this time.
Last year, the Senate also showed enthusiasm for stricter regulation, with Senators Elizabeth Warren, a Democrat from Massachusetts, and Roger Marshall, a Republican from Kansas, leading a bipartisan regulatory crusade. This initiative resulted in the Digital Asset Anti-Money Laundering Act of 2023, which, if passed, would be a major shift in cryptocurrency regulation. The bill, however, focuses on money laundering rather than creating a comprehensive regulatory system.
One explanation for the Democrats’ pivot to a more cryptocurrency-friendly direction is the cryptocurrency wave that is taking over politics and the Democratic primaries in particular.
The industry’s flagship cryptocurrency committee, Fairshake PAC, has raised some $203 million in the 2024 election cycle from major donors, including companies like Coinbase and Ripple, both of which have been locked in legal battles with the SEC and the latter of which was recently ordered to pay a $125 million fine to the SEC, a small fraction of the nearly $2 billion the SEC was seeking. Fairshake did not immediately respond to a request for comment, but has previously told Axios that it sees itself as an advocate for cryptocurrency owners.
Among the PAC’s backers are venture capital firm Andreessen Horowitz, whose founders, according to CNBC, plan to donate to a pro-Trump super PAC, and the Winklevoss twins, through Winklevoss Capital Management.
Fairshake PAC’s spending, however, has been clearly skewed against Democrats, spending a total of $6.7 million on more industry-friendly Democratic candidates this cycle while spending $13.6 million against other Democratic candidates, according to campaign finance watchdog Open Secrets.
Among the candidates Fairshake PAC has tried to take down are California Democratic Rep. Katie Porter, who is running for Senate in the California Democratic primary, as well as Reps. Jamaal Bowman and Cori Bush. The group still has $94 million in cash it can deploy between now and Election Day.
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To put this into context, a report from Public Citizen found that cryptocurrency spending has accounted for nearly half of all corporate spending in the 2024 election so far. Cryptocurrency companies have spent about $119 million on the federal election, or about 48% of all corporate spending so far.
Porter, in light of his primary defeat, launched a leadership political action committee aimed at stopping corporations from spending in the primaries, the Truth to Power PAC. In its words, the PAC is “dedicated to electing candidates who will stand up to corporate special interests, lobbyists and corrupt politicians.”
Jordan Wong, a spokeswoman for Porter, who is also the PAC’s director, said in an email that she would have “welcomed a thoughtful conversation with all stakeholders about how we shape federal crypto policy.”
“Instead, billionaire-funded Fairshake cut off the opportunity for meaningful dialogue by choosing to spend $10 million on attack ads — not even about crypto — without ever reaching out to Katie’s campaign,” Wong said.
Truth to Power’s fundraising effort has pales in comparison to corporate-backed committees, raising only about $450,000 this cycle.
The cost of lax cryptocurrency oversight and regulation is becoming clear. Earlier this month, the FBI released its first report on cryptocurrency fraud. According to the FBI, it received 69,000 complaints of cryptocurrency-related financial fraud, or about 10% of all financial fraud complaints reported in 2021. Americans reported $5.6 billion in losses, or 50% of all losses associated with financial fraud. These complaints have also exploded in recent years, from 35,000 complaints in 2021 to about $1.5 billion in losses.
On this front, both the CFTC and the SEC would be able to combat fraud and scams in this industry, and while the SEC’s stricter requirements could help catch fraudulent schemes before they collapse, either could potentially represent an improvement over the current system.
This is similar to the position held by Rep. Ro Khanna, a Democrat from California, who represents part of Silicon Valley and has at times served as a liaison between the crypto industry and Democrats in Congress.
“Democrats should approach crypto like artificial intelligence, semiconductors, or any other technology that creates jobs and helps America compete in the 21st century,” Khanna said in an email. “The House passed Rep. McHenry’s bipartisan FIT21 bill, which is a first step that would provide regulatory clarity and protect American consumers.”
