In last year's report, I covered a lot of ground regarding the state of crypto policy in the West (pp51-73). This year, I'll recap some of the players and major issues that made headlines, and focus on the new legislative updates and regulatory challenges.
Many of last year's issues are still relevant and ongoing, so if you think I've missed something, go back and re-read the old stuff (law moves slower than crypto).
This year, Congress and the regulatory state have been busy in both the U.S. and Europe. I continue to believe that the U.S. is the most important battleground for crypto policy in the world (thank you First, Fourth, Fifth, and Tenth Amendments!), so while we'll take a short detour into Europe in one section of this chapter, most of the focus will stay right here at my homebase.
I believe 2023 could very well end up being transformational for crypto in terms of permanent law. We should get exchange oversight clarity and stablecoin regulation by law, not regulatory turf wars. And we should make progress on setting standards for disclosures and consumer protections in an ecosystem that desperately needs to fix its trust deficit with the general public.
The OGs of the exchange and stablecoin sectors want common sense regulation. Even some DeFi cowboys see the merits of good policy these days. We can't stand by idly and watch people get hurt by these inventions. Otherwise, crypto will deserve to whither.
If you don't want to read 25 pages of my political thriller, here's a thread I wrote that covers the basics. It's going to be a big year.
Before we talk about where DCCPA (and other crypto legislation) is heading, we have to talk about where we've been and what happened this fall.
Given the high-stakes moment crypto now faces and the significant policy and regulatory headwinds, I'll avoid divulging nitty-gritty details shared with me in confidence (and good faith) and will try not to over-editorialize. With one caveat: I'll break my "no SBF" rule in this section. His actions provide critical (and lasting) context to any analysis, so I'll share details about my interactions with him and the FTX team to give you a full readout. Just the facts.
Then we can talk about my impression of what's coming next for crypto policy.
I also want to set the record straight with respect to my brief, limited relationship with Sam. I want to highlight how cunning I suspected him to be, lest anyone be tempted to fall prey to his media-fueled, carefully crafted, and totally bogus post-bankruptcy redemption narrative.
What I saw in my interactions with Sam was not someone who missed nuance or critical details. Or delegated control to his subordinates. Or chose his words without caution and precision. He's brilliant and – I think – manipulative. He is not "negligent" or "incompetent," as his crisis PR team seems to be positioning him these days, but rather "strategic," "calculating," and "self-pitying."
Like most other people in crypto, I had no idea Sam might be a criminal (though that now is clear). But I had been suspicious of him and his motives for many months privately before getting more deeply involved in crypto policy conversations this fall in D.C. My misgivings deepened when I began actively working to understand just what the hell he was thinking in slamming the DCCPA down the rest of the industry's throat.
I'll acknowledge upfront that I know there will be suspicion, misdirected anger, and baseless accusations thrown around towards anyone who steps foot in D.C. and engages with policymakers on matters related to crypto regulation. You can choose whether to believe anything I claim in this section (though I did keep the receipts), and I won't hold it against you. Criticism and skepticism are healthy antibodies for crypto.
No one should (or could) pretend to speak on behalf of the entire crypto industry on issues of existential importance. But engagement in D.C. is essential, and there are experts whose full-time jobs are to pound the pavement in D.C. to help our industry. We shouldn't abdicate responsibility for crypto policy to hired guns, but we also shouldn't drown the lifeguards we have on staff.
I personally chose to invest time and learn more about the levers at work in D.C. starting this fall. Here's what I saw…
I won't play the hindsight game and pretend I knew the extent of what was going on with FTX and Alameda financially and operationally. But for a while, I was getting increasingly negative impressions of both.
By early 2022, it was clear that Alameda had made a lot of its money through a number of...dubious...trading schemes. They invested in tokens early and farmed them as mercenaries, then appeared to offload them to unwitting buyers at warp speed. They were notorious for backing low-float, high FDV projects, and keeping a ton of the tokens for themselves (which now seemsto have been part of an allegedly fraudulent collateral shell game). A lot of people farmed tokens and played the pon(z)ies in 2020 and 2021. But running a retail-facing business (FTX) joined at the hip of a retail-fleecing investment vehicle (Alameda) reeked to me.
Too many people may have given Sam a pass because they thought he was a savvy trading savant (and he was also helping many of them get rich). I'm also sure a number of skeptics believed it would be dangerous professionally to rock the boat in calling him out. Both were reasonable thoughts. I've never seen anyone in crypto develop such a powerful network of friends at such a breakneck pace. Across politics, legacy finance, and crypto, Sam seemed to be operating at a different level from mere mortals. He was a formidable mercenary.
Sam had explicitly stated in the past that he didn't care about crypto, but for the fact that it was a market to be exploited.
The shoelaces, the hair, the cargo shorts, etc. reminded me of Boris Johnson's act: he was going for the weird but lovable wunderkind of crypto. The billboards were the "jump the shark" moment when I was personally 99% sure something wasn't right with FTX.
FTX's seemingly limitless resources just didn't add up, and whenever I met an investor after 3AC's collapse in Q2 – and Sam's multiple bailout bids for 3AC counterparties like BlockFi and Voyager and pitch to invest billions of dollars into Twitter – I asked the same question: how is it mathematically possible for Sam to have made this much money this quickly and gotten liquidity on so much of it?
I began to quip in recent months (including on stage at Mainnet) that I was an effective altruist. After all, I also wanted to accumulate enough money and power to bend the world to my iron will.
FTX was expanding at a torrid pace, and Sam had a lot of smart backers and mutual friends who were betting on him and putting their reputations behind the company. Given Messari's mission to drive data standards and transparency in crypto, it was important to work with market leaders like FTX.
In fact, I believe we are the only company in crypto to count every single major U.S. exchange and custodian as investors. That's intentional, and I actively worked to get closer to Sam and FTX these past two years to ensure they weren't a glaring omission from our investor network.
That didn't mean my spidey senses weren't tingling. But worst case scenario, I thought it would be a "keep your enemies closer" type of situation.
We took on Alameda for a <1% stake in Messari's 2021 Series A and FTX Ventures for a <1% stake in our Series B (We intend to buy back both investments). I didn't re-engage Alameda over the summer for our Series B, but I did want to work with an investor that FTX Ventures had recently brought on from another major venture capital firm. I viewed her hiring as a sign that the FTX investing apparatus was maturing, and we signed them up.
As they say, "Yikes, dumb f*cking take."
We announced our Series B and the new syndicate of investors (including FTX) the morning of September 21 at our Mainnet summit in New York. That evening Messari hosted a dinner with many of the policy leaders who were in town speaking at the event and fighting the good fight for us all in D.C.
We didn't even get to the damn monkfish before the Blockchain Association's Executive Director dropped a bomb.
"Can we talk about the elephant in the room?" she said. "Sam is selling out the industry to get a monopoly for FTX."
The rest of the dinner was pretty buzzy. I had invited a room full of seasoned pros, and it was the first time that many of them became aware of just how far along the DCCPA had gotten in D.C., in large part because of FTX's aggressive lobbying. Behind closed doors, the legislation was moving at Mach 1.
After digesting the monkfish and wrapping up Mainnet, I emailed Sam and his policy team on the train ride home that Friday. Two days after we had announced their participation in our round I wrote: "I'm concerned with what I've heard about the bills FTX is supporting, and would love to understand - if not align - on strategy. A lack of communication and coordination in D.C. will kill us as an industry, and I want to be sure Messari's customers/users aren't collateral damage of bad policy." I spoke with his team that Monday.
I can only surmise that Sam's initial reaction to my email was, "Why is this guy emailing me, and what does he have to do with policy in D.C.?"
(By the way, it's a fair question as to what I have to do with policy in D.C. The dinner during Mainnet made me realize that every single Messari customer would be impacted by the rules being written by those in Washington, and I needed to gain a clear line of sight. Quickly.)
But after my discussion with his policy team, Sam had clearly gathered that a number of people, including me, had issues with the DCCPA's DeFi language, and were planning to either fix or fight the bill. He knew I was one of the louder business voices in crypto who was now in the know, so we scheduled a follow up a few days later that Sam could join.
We debated DCCPA for almost two hours.
I did not mince words: "FTX is viewed by other crypto lobbyists as a rogue actor looking to create a regulatory monopoly for itself to the detriment of the rest of the industry." We spent a good percentage of the call walking through Sam's view on the political chessboard, and he made his case that the most viable path forward for the broader industry was the one that FTX was spending considerable political and financial capital on advancing.
It was clear he wasn't going to stop pushing the bill. I think it was also clear to him that I was going to help resist it unless its problematic DeFi language was fixed. I thought the language being used would be horrible for the industry and our customers, the vast majority of which didn't have any idea how far along DCCPA was progressing.
Towards the end of that conversation, Sam was getting visibly frustrated that he hadn't converted me. In a shocking moment that felt very much like I was being bribed, he said, "I probably shouldn't say this, but just as a hypothetical...I don't think this bill is bad for DeFi. I don't think I'm wrong on this. But if I am wrong, and anyone in DeFi that supports DCCPA gets hurt, I'm willing to spend a significant sum of money making things right with them."
This wasn't a 1:1 either. His team was on the call. I was floored.
I told him I wouldn't engage in hypotheticals and instead wanted FTX to help fix the crippling and unworkable DeFi language. I wrapped up the call and gave Sam and his colleagues several names of DeFi policy leaders to sync with who would share their specific concerns. I wanted Sam to help advance their concerns in FTX's follow-ups with Senate staff.
I did not feel great after this call. But the fact remained that Sam had spent tens of millions of dollars on a D.C. charm offensive and would have to be handled carefully, so as not to blow up relationships with the policymakers in his orbit who we believed were working in good faith on important, and admittedly high-potential, legislation.
Better to leverage FTX's progress and tweak legislation with good momentum, than to air concerns in public, make the industry look like amateurs, and lose critical staffer relationships.
The calculation was simple: co-opt FTX's influence in order to fix the bad DeFi language. As I tweeted numerous times, it would essentially boil down to "no DeFi, no deal."
I hadn't had any direct conversations with policymakers or their staffs at this point. Messari doesn't retain any lobbyists, aside from being a member of the Blockchain Association with 100+ other companies. And frankly, DCCPA wouldn't even impact us directly, so there wouldn't have been much for us to offer in the DCCPA negotiations.
That said, I thought DCCPA needed to be improved for the long-term health of crypto, and tried to play a small role in helping keep people talking. If we could get the right lawyers in the room to engage on potential redlines that would protect emerging parts of the industry, we could see how the final drafts were trending, and *then* make a decision on whether a coordinated – and loud – rejection of DCCPA was warranted.
Messari counts big exchanges and DeFi projects alike as customers (frankly, in today's world they can't exist without each other), and we'd already convened a couple of previous policy meetups. That's how we ended up curating a small group of people for a follow-up meeting in D.C. to discuss the DCCPA's working drafts, weigh the pros and cons it presented to various industry groups, and most importantly, loop in the FTX team, so they weren't viewed as working in direct opposition to other crypto companies and trade groups.
The D.C. meeting itself was private, the discussion was private, and it would have stayed that way had someone not leaked details to the press. Since it's now part of the public record, I'll share that Sam pled his case to the broader group at this meeting and (predictably) extolled the merits of the DCCPA, echoing many of the points his team had shared with me previously.
His message – and particularly his exit – was not well received.
After Sam made his case, he excused himself from a table of twenty public policy experts with decades of experience in crafting financial regulations, gathered his entourage, and said over his shoulder, "I just want to say I really appreciate your efforts here. Thank you for being super f*cking constructive."
Nothing like a good 'ole pat on the head from the boy genius who's actively trying to sell you out.
The Leak, the Voorhees Debate, and the Alameda Balance Sheet
By the time the meeting in D.C. wrapped up, I'd spent the better part of a month with near full-time focus on policy efforts and the DCCPA. I wanted to get back to, ya know, real work, but more than one trade association predicted that the DeFi-crippling language and full legislation could get slammed through Congress during the lame duck (between Election Day in November and the new Congress taking office in January), and that probability was rising.
A number of investors were starting to grumble more publicly about Sam's lobbying efforts. (Credit to Richard Chen and Vance Spencer for being early.) I tweeted about my redline issues for DCCPA and wrote to a friend, "I'm not going to pile on or come to Sam's defense, but it's good to have a little public pressure on him. FTX could end up being hugely positive in this saga or the villain. And the line is thin."
Still, it was premature for Twitter dunks, since it appeared that the DCCPA was salvageable, and the jury was out on whether FTX would help push for changes to the problematic DeFi language. I also worried that a public Crypto Twitter-led free-for-all would torpedo relationships that many of the trade groups and policy advisors had worked so hard to build in the year since.
(As a card-carrying OG member of Crypto Twitter in all its degenerate glory, I can still acknowledge that crafting, building buy-in for, and passing bipartisan legislation through both houses of Congress is a high-wire act in which the bird app generally Does. Not. Help.)
The DCCPA redlines appeared to be getting worse, not better, though.
One curious change to the early drafts included "clarifying" language around DeFi's decentralized exchanges that would have de facto illegalized automated market maker DEX's like Uniswap, but explicitly blessed central-limit order book DEX's like Serum. (You'd never guess who had $2 billion of SRM tokens on their balance sheet! Ok, ok, it's FTX.)
After that, Sam. Simply. Could. Not. Stop. Talking about policy. While Congress was in recess. Two weeks before an election when staffers would find out whether or not they still had jobs. When pencils were down for a moment to regroup.
From then on, Sam watched his one-time adoring Twitter following begin to turn on him. During periods of high stress, one of his former colleagues told me Sam would turn to Twitter for reassurance that his messaging and decision-making were still on point. But he was starting to flounder and those dopamine hits dropped off a cliff.
First, the DCCPA is now considered a tainted bill, fairly or unfairly. FTX's influence on the legislation is hard to deny, and it begs the question whether DCCPA would have caught or simply exacerbated thedamage of FTX's apparent fraud. Some kernels of the bill may yet survive and make it into an evolved bill in the new Congress, but I doubt the current name or contents live on without material changes.
Second, there needs to be justice for Sam's crimes. It's not about retribution. As the indictments roll out, they look so damning that my hunch is Sam has simply been positioning himself to cop a negligence case and minimize the damage. But that would be a failure of justice. My first-hand experience, and that of dozens of other smart people who were snookered by Sam, was with a hyper-competent Machiavellian.
His full, forthcoming prosecution in the U.S. is a sign of the integrity of our justice system and a deterrent to similarly egregious future financial crime. Most importantly, it will prevent Sam from doing something like this again.
This saga has been terrible for crypto. But it's been even worse in terms of the human cost. Life savings lost. Investors spooked. Employees gutted. Sam's self-serving actions have had brutal consequences, and the consequences should be proportionate.
I hope Sam Bankman-Fried spends decades in prison. Where he belongs.
How a Bill Becomes a Law
At this point, you might be thinking, "why were all of these meetings happening in private? Seems like that classic smoke-filled room I've heard all about in every political thriller, and it stinks. Crypto policy shouldn't be happening behind closed doors."
On that I would like to agree, but I'm not sure we would like the results. Folks within the crypto industry generally have three options when it comes to engaging with policymakers:
Spend a fortune on in-house and external advisors, legal, comms and lobbyists, and plan to spend a lot of time in person meeting with regulators, staffers, and members.
Apply to join one of the major trade associations like the Crypto Council for Innovation or the Blockchain Association. This will also cost you six figs at least. In Washington, the overlap between "good at policy" and "groks crypto" is small. If you're a decent crypto lawyer, but you rage quit group discussions like a five year old, you won't be very effective at policymaking.
Send mean tweets and rile up the base. A lot of people underestimate this. I don't. Twitter can be an effective antidote to *bad* bills. But Crypto Twitter is rarely a drone strike, with little penetration into "D.C. Twitter," and often a suicide vest. You can't write laws via Twitter, but you can give policymakers ("electeds" in D.C. parlance) a valuable temperature check on what their constituents actually care about. We saw this last year with theInfrastructure Bill debate.
My personal policy strategy can be boiled down to "protect consumers, and do no harm."
Messari is not a company in Washington's regulatory crosshairs, but we invest in policy because good outcomes will help all of our customers. For transparency, here's where we land: approximately $1 million / year in crypto advocacy. These costs are direct (in-house resources), indirect (dues for Blockchain Association, Coin Center, and contributions to GMI PAC), and in-kind (investments of company time).
We don't invest in tokens like the most highly engaged big funds (a16z, Paradigm). We don't manage customer funds or facilitate crypto money flows like the big crypto financial players (Circle, Coinbase, FTX, Kraken). And we aren't fighting for the right to exist like the personal wallet providers (Ledger) or ZK privacy technologists (Zcash).
But we invest anyway because good policy outcomes will help all of our customers and elevate the broader industry.
Yes, I also send the occasional mean tweet when I think it can be effective in helping form a narrative around an enemy. And at the risk of sounding immodest, those have been effective. My "crazy" tweets from last summer about the sitting SEC Chair are now ledes in the Wall Street Journal's op-ed section, and influential sitting members of Congress seem to be forking specific attack lines I've used in the past.
Policy inception via mean tweet? Sort of. But again, Twitter only goes so far.
For as much progress as we made last summer in raising hell over the Infrastructure bill's problematic "broker" definitions, that language was signed into law without a single change.
In other words, we lost.
To win in D.C., you have to play the D.C. game. We'll be fighting the constitutionality of certain laws for years to come. We'll be duking it out with overreaching regulators until we have a new administration in the White House. (Sorry!) But that's all defensive strategy.
A high-octane offense can deliver results where it matters – in elections, positive legislation, and regulatory carve-outs. FTX actually had a good offensive playbook, but it was selfishly designed to hide its principal's operational corruption.
To understand the process behind lawmaking, let's run through a fictional example.
Below I've replaced real players with code names, and shuffled around just enough details to avoid blowing up specific lobbyists, staffers, or members of Congress. It's a cleaner and more entertaining analysis, and this is the closest I'll get to Margot Robbie in a bubble bath explaining the subprime crisis.
I hope this helps convey how a political process that can be maddening at times, does, in fact, work in a democratic nation with 330 million people, and I hope it helps illustrate how some crypto proponents may end up willing to make some tough concessions in order to ward off much worse – and existentially bad – attacks from our political enemies in the new year.
Let's dive in…
1. A hypothetical conversation in D.C. in 2021 after the Infrastructure Bill:
Senator Bob: "This crypto thing is getting pretty big. I didn't realize how many people cared about this stuff, I thought it was just a bunch of gambling degenerates, but we've actually heard from a bunch of voters and startups about the things they are building, and some of the concerns seem justified. Our regulated exchanges aren't getting the clarity they need and losing market share to offshore entities. We're killing earlier stage companies with legal costs, and it's important that we separate software from custodial financial services."
Senator Karen: "Crypto is full of shadowy super coders whose mission is to undermine law enforcement, evade taxes, gamble with customer funds, and destroy the U.S. Dollar. They also want to destroy the environment as crypto 'payment processing' (i.e., mining) burns enough coal to power a Scandinavian country. Burn it all down, or give regulators the authority to crack down."
Remember, this is our starting point for the debate. It's crypto's Overton window, and it will inform everything that happens next.
2. Over the next few months, Senator Alice, a friend and political ally of Senator Karen meets with Senator Bob. Senator Alice: "Karen has some good points on crypto, and I agree with her on most things politically. Bob, I disagree with you often, but it also seems like you agree that these crypto exchanges need clearer oversight, and that pushing the problems offshore isn't necessarily protecting Americans, just creating more black box risk for us internationally. Is there something for us to work on together here? Oh, and by the way, I met this charming young man who doesn't seem like the other crypto zealots at a Save the Whales gala. His name is Flash, and his team wants to meet to discuss some of the issues they're tackling and help us think through potential solutions."
3. Wouldn't you know it, Senators Alice and Bob (and just as importantly, their staffers) realize there is bipartisan support and common ground for a bill that would solve the country's crypto exchange oversight issue.
But in order for a bill to become a law it has to:
a. Get drafted, including "redlines"
b. Get "marked up" in Committee and pass out of Committee to make it to the floor
c. Secure 60/100 votes in the Senate to break a procedural block (the "filibuster")
d. Secure majority support in both the House and the Senate
e. Get signed into law by the President
Because there is no point in spending time and energy on bills that have no change at steps c, d, and e, the majority of time spent crafting legislation is in steps a and b. The members and their staffs share the same goal: draft something bulletproof that can make it "out of committee" and then pass via a broader vote. As such, this is where closed door concessions get made that are necessary to win support later in the process.
4. Alice and Bob sit on one of the same Senate committees, which is responsible for overseeing the Alice and Bob Commission (ABC), one of the two major financial markets regulators. Senator Karen sits on the committee that oversees the other major financial regulator, the Safety and Truth Department (STD). Senator Alice: "I love Karen, but we're never going to get anything done if we need to work with her on this. Let's draft this in a way that avoids STD's involvement. Then we won't have to refer this to her committee. One of Flash's team members was at the ABC previously, and they have some ideas for how we can avoid the STD."
5. Because Senator Alice sits in the majority party, she is the Chair of the committee that oversees ABC. Senator Bob is the "Ranking Member" of the minority party. Both are important. One of Alice's staffers, a lawyer named Linda, holds the pen on the draft. Linda has lots of experience, so she knows how to expertly navigate three big challenges:
Secure buy-in from the bill's co-sponsors. She's working hard to get a bill drafted that protects investors from fraud and abuse (Alice's top priority), without stifling innovation or hurting the U.S. competitive positioning in an emerging financial market (Bob's top priority). There are two other co-sponsors, Xavier and Yann, who will have secondary input as sanity checks. If all the sponsors are happy, things are in good shape.
Figure out who to trust within the crypto industry. This is not a trivial undertaking as crypto is an ever-evolving landscape, and most of its players are new. Market leaders have a history of collapsing, going to jail, or getting embroiled in litigation with major regulators. You need industry at the table to get the technical details right and win Bob's support, but you also need to ensure industry doesn't *love* your bill, or both Alice and Bob will be viewed as far too lenient.
Keep the bill sufficiently narrow to avoid procedural objections from Senator Charlie, who sits on *both* financial regulatory committees and is generally an ally of Senator Karen. Charlie will be a good signal for what can get out of Alice and Bob's committee without veering into Karen's jurisdiction. Linda needs to throw him some bones for this to have a viable shot at getting passed.
As you may have gathered, Linda is pretty important!
She is also a single human being with finite time and capacity for feedback. In the same way that you shouldn't write software with 100 people, but 100 people should review it, you shouldn't craft legislation with 100 people, but 100 people should review it.
Early on in the drafting process, Flash and his team have enormous impact, as they've been at the table from the jump, and some of them (like Linda) understand the ABC well because they actually worked there! This will come as a surprise to some, but @RarePepe420 will not have the same impact as Linda's former ABC colleagues.
6. "The Bill" has a name. The Alice and Bob Commission Promotion Act, or ABCPA.
Once bills have names and people start to say those names out loud in D.C. they start to get taken a bit more seriously. By early fall, ABCPA is *red hot* in part because Flash and his team are on billboards, partying with Tom Brady, Giselle, and former Epstein Island-resident Presidents.
Flash is making it rain in PAC spending, and meeting with House and Senate leadership to convince them to append the ABCPA to one of the "must pass" bills Congress has to consider during the lame duck. Oh and by the way, don't forget he's going to give a billion dollars to re-elect President Biden and the rest to Save the Whales. What a mensch! Flash isn't like those other dirty crypto subversives. This guy gets it! He wants to be regulated and protect consumers. And he understands that we can't just pass a bill that oversees centralized exchanges, we need to get this DeFi thing under control as well!
7. See previous section.
8. "Well that was a nightmare," thinks Linda. "Maybe Karen is right," thinks Alice. "I just want to go back to my farm and never hear about crypto again," thinks Bob. "Muahahaha," thinks Karen, evilly.
And just like that, the probability of a 2022 ABCPA drops to near zero, and the 2023 policy discussions are re-decentralized, potentially even off the table. Even if Alice and Bob can get ABCPA out of committee, and through the Senate next year, Karen's perfect political foil, Congressman Paddy O'Shea now Chairs the House committee that oversees the STD.
O'Shea is part of the changing of the guard from the November election. Nothing changes in Senate leadership, but everything changes in the House, and the new House leaders have a thing or two to say about the STD, and want to prevent its overreach from spreading.
Crypto's legislative options now boil down to a proxy war over how authority is split between the ABC and the STD. With Flash out of the picture, a dozen other industry leaders (with more nuanced, technical, and balanced views around what constitutes positive legislation), have entered the chat, and their stock with members and staff has risen considerably.
You might not like how the sausage gets made or agree with every policy emissary the crypto industry has representing the movement in D.C., but I will tell you one thing definitively: Flash's demise is good for crypto's long-term health.
Here's what happens next.
The SEC vs. CFTC Proxy War
The Senate Banking Committee, controlled by crypto adversaries, and the House Financial Services committee, now controlled by more open-minded crypto proponents, oversee the Securities and Exchange Commission (SEC), whose Chair, Gary Gensler, is more or less crypto's public enemy #1 in D.C. (Not winning Dem or GOP friends either!)
The Senate Agriculture Committee and House Agriculture Committee oversee the Commodity and Futures Trading Commission (CFTC). "Senate Ag" sponsored bipartisan crypto legislation that would have given the CFTC primary jurisdiction over the crypto spot exchanges. House Ag, like House Financial Services, is now controlled by more open-minded crypto proponents.
When we're thinking about legislation and oversight of the crypto spot markets, the CFTC seems to be the more appropriate regulator of most crypto spot markets today. The majority of crypto market cap and volumes center around bitcoin and other true crypto-currencies (ugh, Doge), and truly decentralized Layer-1 platforms like Ethereum (and Cardano, Polkadot, Solana, Avalanche, Cosmos, etc.) that don't pass most people's sniff test when it comes to looking and acting like investment contracts or securities. (An overreaching SEC may disagree.)
As a result, legislation that puts the CFTC in the driver's seat in the oversight of exchanges and custodians like Anchorage, Coinbase, Gemini, Kraken, and others seems to make sense. The CFTC is no slouch as a regulator (as we'll see below), but at least they aren't openly hostile to crypto's existence, and exchange compliance would seem possible under their oversight.
SEC oversight, on the other hand, would likely prove impossible, as exchanges wouldn't be able to list assets like ETH until they were either issued "no action letters" as non-securities, or registered with the SEC. How does a decentralized Layer-1 protocol and its community produce centralized financial reports and disclosures, you might ask?
Well, I think you have your answer for how unworkable SEC authority is to the future of crypto in America.
The Crypto Counsel for Innovation's (CCI) CEO, Sheila Warren, lays out the most likely path forward by drawing on some history:
"Where does policy go from here? Dodd-Frank gives some insight. At the center of the  collapse were exotic and largely unregulated financial products called derivatives - credit default swaps (CDS) were sold on billions of dollars of securities backed by shaky mortgages (MBS). Think of CDS as insurance on default risk.
In the 1990s, derivatives were seen as an exciting financial innovation that could unbundle risks, and Washington decided the economy would benefit from as little regulation as possible. Fed Reserve Board Chairman Alan Greenspan in 1999:
'By far the most significant event in finance during the past decade has been the extraordinary development and expansion of financial derivatives.'
When I worked as a Wall Street lawyer in the early 2000s, CDS were gaining popularity among many financial firms and had moved well beyond super elite traders. In fact, several cutting edge financial firms were exploring other similar products. In 2008, mortgages began to default rapidly and suddenly everyone who sold those MBS derivative products – CDS – owed a lot of money, causing a global economic meltdown and revealing just how interconnected financial institutions were. The contagion was shocking and severe.
Title 7 of the Dodd-Frank Act subjects all derivatives to substantive regulatory oversight – 'swaps' are regulated by the CFTC & 'security-based swaps' by the SEC. Two years after enactment, the agencies issued a joint rulemaking defining these terms. So these things can take years.
[Fast forward to crypto, post-FTX collapse.] Reactive, panicky policies are not the solution. Now is the time for thoughtful, careful discussion with lawmakers and stakeholders to ensure the U.S. crypto regulatory framework promotes safety & soundness, protects consumers, preserves our innovative edge, and prevents bad actors."
The CFTC regulates the custodial exchanges, "digital commodities" like BTC and ETH, and carves out DeFi (for now).
Stablecoin issuers face new oversight requirements that outline the rules they will need to follow in order to fully integrate with the legacy financial system.
And then, and only then, we can have a discussion around the SEC's role in overseeing bona fide crypto securities. Ideas like SEC Commissioner Hester Peirce's Safe Harbor provide a glimpse at how the Commission could deal with the gray area in between.
As Ledger's Seth Hertlein pointed out, the DCCPA never "solved the threshold 'what is it' problem. (security/commodity/other). In fact, it may make things worse by creating a new bucket (digital commodity), giving the CFTC primary authority, but then giving the SEC veto power over CFTC decisions. That won't go well." Those definitions will be tricky, but critical.
Common sense might yet prevail, but we've got a couple of big, powerful mob bosses that stand in the way of a short-term resolution.
MiCA Pros & Cons
It pains me, but we have to talk about Europe and their mixed bag of policy tricks, Markets in Crypto-Assets ("MiCA") and the Transfer Funds Regulation ("TFR"), since they are now law of the land across the EU, and will go into effect by 2024. These two bills form the backbone of three years worth of discussion regarding a comprehensive regulatory framework for crypto. Some of it is terrible and should be avoided at all costs in freedom-loving countries, and some of it borders on passable, if not positive.
Let's start with the good news.
There's clarity from a big economic bloc in terms of their treatment of crypto in the years ahead, and they think this is a step forward in consumer protection and market integrity.
They (mostly) focus on centralized Crypto Asset Service Providers ("CASPs") and asset issuers and focus on rules that would protect against market abuses. They kick DeFi regulations down the road until after the sector has been properly studied.
They require CASPs to have real presence and management in the EU, hold them liable for damages or losses caused because of hacks or operational failures, and mandate that client assets are segregated in case of bankruptcy.
Asset issuers are responsible for certain minimum disclosures, and for assets without any issues (BTC, ETH), exchanges will have to provide a white paper and other basic information if they want to list them, in which they could end up liable for mistakes.
The early returns on their DeFi "study" are encouraging! They want to regulate legal entities versus protocols, introduce a voluntary framework for DeFi supervision, establish something called "embedded supervision" (on-chain monitoring!) and oversee oracles.
They didn't ban bitcoin thanks to its energy intensiveness, as some radicals had initially proposed, though they do have some maddening ESG reporting provisions in MiCA.
And they provide a path to a digital euro stablecoin that isn't necessarily a central-bank digital currency. That's a loaded section of regulation. They cap issuance for asset-referenced tokens ("ARTs") and non-euro e-money tokens ("EMTs")
NFTs are excluded (for now), except if they have a function that would make them some sort of financial instrument. (ApeCoin versus Bored Apes comes to mind. More later.)
As for the problem areas?
TFR is one of the strictest implementations of the Financial Action Task Force's "travel rule" anywhere in the world. It introduces detailed AML requirements for CASPs, including transactions that touch personal wallets. It doesn't ban peer-to-peer transfers or personal wallets outright (in fact they've gone from referring to them as "unhosted" to "self-hosted" – little victories!), but it is invasive.
There are no exemptions or minimums to TFR for transfers between CASPs (more onerous than banks), and CASPs must apply "risk-based" AML measures and verification if transfers to a given wallet exceed 1,000 euros.
I know it doesn't sound too good, but for a long time, it looked way worse. For most transfers to/ from wallets, there won't be a mandatory verification. Hence, this key demand ("unhosted wallet verification") from the EU Parliament was quite weakened.
Algorithmic stablecoins are essentially banned. It's not just about the LUNA disaster. Remember this regulatory framework was originally urgently proposed and conceived after governments worldwide began to hyperventilate about the potential of the supranational Libra currency out of Facebook.
They included a requirement to write "regulatory technical standards" to establish "minimum sustainability standards for consensus mechanisms," which could end up being a backdoor way to ban Proof-of-Work mining, if not bitcoin itself.
Crypto lending is not covered, but it will be reviewed later. I suppose that is a positive given it's not a restriction, but given that a crypto crisis got us into this year's mess, it seems like an omission.
Much like we have legislation and rulemaking in the U.S., MiCA and TFR can be thought of as permanent legislation passed by three "political trilogues" (the Commission, Council, and Parliament, which has some similarities to the House versus Senate in the U.S.) that will now be put into effect by "technical trilogues." A key difference in the EU, is that the industry's input into the final technical text (i.e., the letter of the regulations) will be much more limited than in rulemaking with U.S. regulators.
Bureaucrats know best and will take it from here.
Passage of MiCA and TFR is now all but a formality in early 2023. After that, the stablecoin regulations will go into effect 12 months later, and other MiCA and TFR provisions 18 months later with periodic reviews and reassessments of the policy baked into the framework.
Aave's Rebecca Rettig has broken all of this down in a couple of interviews, including this one with The Economist, and Circle's Patrick Hansen has been a veritable fountain of valuable context and nitty-gritty updates on Twitter. Consider much of this section stolen from those two primary sources on the ground, plus Ledger's Seth Hertlein, my spirit animal in fighting for privacy and personal wallets.
Their work and other policy leaders' work is only getting started going into 2023 in Europe. With any luck, they'll also be able to point to the temperance in the EU's DeFi study language to carve that language out from bills like DCCPA. It would be nice to get DeFi-less exchange and stablecoin legislation passed in the new U.S. Congress, even if asking for utility tokens to earn designation as a new type of asset is too much to hope for.
Everybody Hates Gary
It's the new hit sitcom on YouNow TV.*
(*Oh wait, the SEC killed them. It turns out SEC reporting requirements for a consumer token is impossibly restrictive: "Props Tokens' status as qualified securities significantly limits our ability to respond to changing market conditions in a commercially feasible manner. [We must] make public filings and often get prior regulatory approval for product changes. As a result, we are unable to follow anything remotely like proper product development of "launch, measure, iterate" and struggle to launch new key functionalities we develop (like staking or per-app tokens).")
The first thing you need to know about Chair Gary Gensler's SEC is that they have never met a company they didn't want to sue (except, apparently, FTX). They're suing Ripple over XRP's status as an unregistered security, and it now looks more likely that they will win the case in 2023 given new evidence and the precedent set in the LBRY case. They snuck a side door "unregistered securities" claim into an insider trading at Coinbase that the company itself had investigated and referred to authorities.
The second thing you need to know is that this SEC missed most of the major problems that were going on right under their noses. They never seemed to investigate FINRA-registered broker dealers for their reckless institutional lending practices. They allowed GBTC to float in the public markets with no redemption mechanism, which led to massive harm to retail investors, and a toxic collateral asset that sparked contagion (as discussed last chapter). To rub salt in the open wound, they seem to have cozied up to FTX and purportedly considered a "no action" letter for its affiliated IEX securities exchange, while seeming to ignore the well-documented evidence that FTX's core business relied on a related market making and prop trading shop, a model that doesn't usually fly unless you are a deep-pocketed political ally.
One reason to root for legislation to pass that empowers the CFTC is because the status quo under Gensler is untenable. Without clear legislative guidance as to where the SEC's authority begins and ends within crypto, the industry will continue to fight a trench war – for years – with this SEC and its current leadership. We'll lose the war of attrition, and even if we survive, we'll be badly bloodied as a result. It's the primary reason most crypto policy people are willing to make some tough concessions on bills like the DCCPA.
A complete absence of legislation will leave crypto's fate in the hands of administrative courts, delay adoption, rack up legal bills, and throw default oversight advantage to one of the world's most openly hostile crypto regulators.
Ooki vs. CFTC (DAO Governance)
Given how aggressive Gensler's SEC has been with the crypto industry, it's natural to expect many people to begin longing for oversight from a different, more open-minded regulator.
There is a lot riding on the CFTC versus SEC question, but it's important to note that the CFTC is hardly a slouch when it comes to regulatory teeth. Determining crypto's most fitting regulatory framework needs to be future-proof, not a mere attempt at jurisdiction-shopping due to a single adversarial regulator who happens to hold his appointment at a single point in time.
Remember, it was none other than <checks notes> CFTC Chair Gary Gensler who was ultimately responsible for implementing key provisions of the Dodd-Frank Act in the aftermath of the 2008 financial crisis.
Gensler served in the role from 2009 to 2014, and even back then was considered to be a ruthless taskmaster. The last truly major rulemaking the CFTC did (68 new rules!) was under Gensler's watch as the CFTC sought to bring oversight to the OTC derivatives markets, and expanded from the $35 trillion futures market to the $400 trillion swaps market.
It matters what authority is bestowed on a regulator by law, not who the person in charge at the moment happens to be. Because all regulators will ultimately face the temptation to regulate via enforcement. Look no further than the Ooki DAO case, which CFTC Chair Rostin Behnam argued was "soegregious and so obvious" that they had no choice but to pursue it.
A centralized trading and margin lending protocol called bZx ran what the CFTC deemed to be an illegal and unregistered operation. To skirt the laws, the bZx founders kicked its product into a token-governed DAO called Ooki, which had a limited number of key stakeholders (including the bZx founders) who made decisions on behalf of the protocol via token voting. Because it would have been hard for the CFTC to track down and pin liability on every single participating tokenholder, they chose an easier route: a sweeping enforcement action that would hold the entire DAO liable and imbue the regulator with new authority thanks to the precedent set by a default win in court.
The man at the helm of the CFTC, Chair Benham, strikes many as a more reasonable regulator (I like him personally), but that's not the point.
Law is permanent and subject to misinterpretation and abuse if not carefully, narrowly crafted.
That's one of the most controversial things you can say in the West right now when it comes to financial surveillance, but it's a rallying cry worth fighting for.
Indeed I've been encouraged at how many crypto leaders have stepped up to the plate to aggressively defend privacy. Coin Center's challenge to the 6050i reporting provisions included in last year's infrastructure bill was the legalese around Neeraj's all-time banger of a tweet: "I'm sorry that your warrantless surveillance regime was built on the assumption that people would always need intermediaries to transact."
They've also been at the forefront in defending privacy-preserving technology in response to the Treasury's unprecedented and unconstitutional decision to sanction Tornado Cash.
We touched on the situation briefly in the "People to Watch" Chapter, and I'd encourage you to read Coin Center's analysis in full, as it's important. But in brief:
The Treasury's Office of Foreign Assets Control (OFAC) placed Tornado Cash, the protocol, on its Specially Designated Nationals And Blocked Persons (SDN) List. The SDN list is a sanctions list that typically covers individuals and companies, who can petition for their removal.
In the case of Tornado Cash, not only were the Tornado Cash *entity* and related persons sanctioned, but several Ethereum addresses for the TC *smart contract* were also included. These contracts can't be modified once deployed, and as bits of permanent computer code, cannot defend themselves or petition for their SDN removal.
Coin Center pointed out that other divisions of the Treasury (FinCEN) had in the past noted this common sense distinction themselves!
U.S.-based Tornado Cash users are now banned from interacting with the Tornado Cash protocol, which includes sending and withdrawing funds from the application. That goes against Fifth Amendment protections around due process.
It's refreshing to see the solidarity – especially since this battle is as much about pushback over the chilling effect regulatory overreach will have on innovation (OFAC violations are not "slap on the wrist" sort of crimes), as it is about the right to private transactions.
We simply must win this one.
Protecting Crypto Banking
Senator Warren will likely hate crypto until her dying breath. She doesn't like the people, she doesn't like the audacity of speech and software that sits outside of the vice grip of the state, and she certainly doesn't like that crypto companies have access to U.S. banking.
In a recent letter to Silvergate, Senator Warren questioned why a well-regulated bank (one that counted FTX as 10% of its deposits, and included a glowing customer testimonial) had missed evidence of massive financial fraud. This seems reasonable, if annoying, and it was a bipartisan letter. But the fact that a bank was unable to detect fraud between related entity accounts of a depositor is not surprising, especially given a) the known volatility of that depositor's end market this year, b) the nature of the depositor's business in market making and exchange, and c) the fact that Silvergate could only ever see a tiny fraction of the full FTX balance sheet, which was predominantly denominated in crypto. As you'd expect a crypto exchange's balance sheet to be.
A cursory study of Silvergate and its financial filings show that concern over its solvency is overblown. If anything, the Warren witch hunt could spark stress and withdrawals that wouldn't have happened otherwise. I wouldn't be surprised if the FTX bankruptcy, subsequent contagion, and perception-is-reality FUD halve the bank's deposits quarter over quarter. Maybe worse.
But what would happen if Silvergate deposits – "substantially all of which are derived from our digital asset customer base" – decreased from $12 billion in Q3 to $6 billion by end of year?
Not much actually. Their leverage ratios were nearly 10x higher than the minimum regulatory requirements at the end of Q3.
Silvergate has run a clever business: become a port in a storm for crypto depositors and use that liquid capital to fuel a boring, plain vanilla commercial bank. They held $8.5 billion in marketable securities (70% of its demand deposits) at the end of Q3, and the rest of the loan book is mostly exposed to floating rate loans (limited interest rate change exposure).
I'm not sure they would be A-OK with a 90% drawdown in customer deposits (would any bank?), but as long as Silvergate CEO Alan Lane gets together with his other big customers and convinces them that assets are SAFU, they should be able to weather the storm. Those same customers don't want Silvergate going under either. Live together, or die alone.
Of course, Senator Warren doesn't want to stop at simply investigating Silvergate. She wants banks to stop servicing crypto companies. It's a full-on witch hunt and her letter to the Federal Reserve, FDIC,and OCC exposes her real intent: to ban banking to crypto companies.
The Silvergate letter was allegedly written in response to a push from a well-known short seller who had been aggressively hitting D.C. with his anti-Silvergate pitch and found a pliant audience in the ulterior-motivated Warren. The Senator even went so far as to misquote a Washington Post article in her letters to regulators, falsely writing that Silvergate's "deposits quarter-to-date are down $9.8 billion" versus the original WaPo text that "average deposits quarter-to-date were down to $9.8 billion." (emphasis mine)
That's a very convenient "typo" that is otherwise a material misstatement of fact regarding a public company. One that could trigger a bank run at one of Senator Warren's chief political targets crypto-friendly banks.
I would love to tell you that Senator Warren is the only problem when it comes to crypto's access to banking. But the Fed has been playing favorites and breaking its own rules, too.
Caitlin Long's Custodia Bank is suing the Fed over its inaction on her company's application for a Fed master account, while the Fed flippantly approved BNY Mellon's similar crypto custody service inOctober. I spoke with a couple of people who have had lengthy careers *at* the Fed, and they think Long and Custodia have a pretty strong case. Those conversations happened before the FTX blow-up (perhaps things have now changed), but this will remain one of the most important under-the-radar legal battles to watch in the new year.
Crypto needs banking access, or the U.S. crypto ecosystem will be starved of on-and-off ramps, liquidity, and customer credibility.
As a closing note, this sort of thing isn't all bad: if you want to red pill good people, cut off their banking access. Nothing screams "buy bitcoin" quite like institutionalized unpersoning, financial speech crackdowns, and morality banking.
Stablecoins, not BTC or ETH, are now the backbone of the crypto economy. We'll talk about the progress of various types of stablecoins in the next chapter, but for now, know that there's two things to keep an eye on early in 2023.
New House Financial Services Chair, Rep. Patrick McHenry, wants a digital dollar, as does outgoing Chair, Rep. Maxine Waters. Congressman McHenry admits that their bipartisan legislation is a bit of an ugly baby, but it's still arguably an improvement for the crypto industry. Their bill could answer whether the Fed has the authority to issue a CBDC (banks might not like it as it could threaten deposits), and pave the way for banks and non-banks alike to issue stablecoins subject to certain licensing requirements. It would resolve concerns around the type of assets that could back stablecoins (cash and short-dated Treasuries).
Algorithmic stablecoins will be in the crosshairs in both Europe (under MiCA as noted above) and the U.S. It's hard to argue that LUNA was anything other than a colossal mess for market participants worldwide, and its failure could lump other sustainable collateralized stablecoin implementations like Maker's Dai with the truly suspect (OHM). Odds are good that the best-case scenario for algorithmic stablecoins is that they are left alone and relegated to DeFi, never touching regulated exchanges. That would leave the experiments, which have historically proven to be crypto WMDs, fully cordoned off from the legacy financial system.
The $10 trillion question is whether the future of stablecoins sits under the Paxos model (preferred jurisdiction is New York State) or the USDC model (preferred jurisdiction is federal). I find it hard to believe Tether will prove to be the eventual winner, though. There's a lot riding on a gradual flippening of stablecoin market caps versus a sudden shock, as USDT exchange volumes dominate on international exchanges and are an order of magnitude higher than USDC.
The Ground Game
An underappreciated component of crypto policy efforts this past year is in what we'll call the "ground game." The thankless, multi-year, never-ending work of educating (and scoring! and supporting!) policymakers, eking out state-by-state progress in the laboratories of democracy, and fielding pro-crypto candidates in new elections.
The major trade associations have staffed up this year and done yeoman's work. They'll continue to have their hands full in the new year in the wake of the FTX fallout, but at least they'll have 19 new crypto allies in the next Congress, thanks to the organized efforts of one of crypto's top super PACs.
This year it's all about doing the work of reshaping the narrative (here's a good 101 and 102 primer on American influence), setting our own standards as an industry (Salvation Lies Within), and building solutions to the problems that plagued us this last go around.
Many of those solutions will be built at the centralized infrastructure level that we discussed last chapter: enterprise-grade security of exchanges and custodians, reliable and intuitive self-custody, financial, operational and governance transparency, Proof-of-Reserves and segregated customer accounts, etc.
It's the decentralized software that we're most excited about, though, and those solutions are what the rest of this report is all about. It's time to talk about crypto-currencies, scalable Layer-1 transaction ledgers, DeFi, NFTs, DAOs, and decentralized infrastructure networks.