They say that one dog year is akin to 7 human years. In the case of crypto it would seem we need an even greater ratio: one month is akin to a lifetime, for so much can change.
Certainly July was a month like that. It began with a strong start, followed by cavitation and a swift downdraft about 2/3 of the way through the month, then rebounded with a huge rally. This occurred after months of consolidation where many retail investors were experiencing cold feet. Simultaneously, institutional investors continued to accumulate in anticipation of the next bull run, which we believe is upon us. Meanwhile, while the markets shot up, things got very interesting on Capitol Hill.
The specter of regulation has long been in the back of the minds of many and, certainly, regulation is going to be a part of the crypto world. The question is, how much, when, and to what effect? SEC Chair Gensler weighed in early in the month of August, stating that he felt that “all” crypto assets were securities and, as such, should be regulated by the SEC. It’s clear that some certainly seem to have acted like securities (I’m looking at you, Ripple), while others, not (hello, Ethereum.) Upon inspection terms like “all” don’t really seem to apply and even point to a lack of understanding of the nuances of this new asset class. Of course, not to be stepped over, Brian Quintez, CFTC chair stepped in a day later and said that crypto assets like bitcoin were actually commodities and should be regulated by the CFTC. None of this is new; this debate has been ongoing and I suspect will be for a while now. From our purview, a little well thought out regulation is not a bad thing, but it needs to be done consciously and at the right speed. Our own CIO Jake Ryan weighed in on this noting in his Newsweek Article, “Crypto Regulation – Let’s Begin and Begin Slowly”, that perhaps crypto can be both a security and, over time, a commodity.
Crypto: Roads & Rockets
While all this was going on, the infrastructure bill took a surprise jab at the crypto verse and included crypto as a part of their bid to pay for the most ambitious infrastructure project in decades. As written, the bill would declare anyone “responsible for and regularly providing any service effectuating transfers of digital assets” to be a broker, subject to tax reporting requirements. Ok, that makes sense for exchanges which allow the buying and selling of crypto assets but, as defined, it could be interpreted to encompass miners, wallets and virtually any entity that transacts crypto. This creates a huge, unrealistic, and inappropriate burden on many nodes of the crypto universe that have nothing to do with brokering transactions. While Biden states he has no intention of applying this to miners et. all, the language is not protective and leaves a crater sized hole open to interpretation.
To the surprise of pretty much everyone on Capitol Hill and, frankly, everyone else, a huge rally of support occurred from the crypto community. This included evangelists ranging from usual suspects Jack Dorsey and Elon Musk to former OCC Chair Brian Brooks to even government backers such as Sen Twomey (R-Pa.) and Lummis (R-Wyo.), who spearheaded an amendment to the bill that would more clearly define brokers and exclude actors who are clearly not.
The bipartisan amendment was expected to pass without issue, however there was a lone vote which prevented it. This was from Sen. Richard Shelby (R-Ala.) who refused to vote for the amendment unless his amendment on increased military spending was also accepted. Yes, that’s right. Everyone in the senate agreed on the amendment and, in the case of Shelby, it’s not that he didn’t agree. He blocked it he wanted to tack on an unrelated military spending amendment in a game of quid-pro-quo. Crazy, right?
So, the amendment didn’t pass and the bill has been sent to the House as written. Even so, I consider this a huge win for crypto. It’s like Rocky Balboa (let’s set the wayback machine to the original Rocky I please). Rocky didn’t technically win his first fight with Apollo Creed, but he sure won the hearts and spirits of all those who experienced his triumphant stand against a virtually unbeatable foe. So too, here.
We now see that crypto has a large and impactful lobby on capitol hill which includes 60 registered lobbyists as opposed to only one registered lobbyist five years ago. We also experienced rapid response and bipartisan support which listened to industry concerns and drafted a compromise so reasonable that it won over congress including, most importantly, Sen. Ron Wyden (D-Ore) the top Senate Democrat responsible for writing tax legislation. That’s huge. Huge. This sends a clear message that the fear of crippling regulatory action can be overcome, and that the industry can be addressed thoughtfully and carefully by our government.
It’s up to the House to make the amendment happen but the crypto verse seems confident as prices continued to climb on Monday and Tuesday this week even in the wake of the unchanged language. Hopefully our representatives see that overly Machiavellian initiatives are ultimately bad for the industry, because if miners, wallets and general blockchain technology actors think they have an unfair burden they will simply exit the US and set up shop elsewhere. China already showed us this can happen. Thankfully, it looks like our reps are finally paying attention to this space in a properly-considered way.
Fork this Chain
This update has gone overlong but I would be remiss not to mention the Ethereum “London” hard fork which occurred on August 5. This was a major step in moving the world’s second-largest crypto asset by market cap to a proof-of-stake protocol. Importantly, it also supports a new tokenomics policy which burns every ETH transaction fee. This is huge as it’s the first time we’ve seen a systematic process for reduction in supply. The markets certainly seem to like it with the price of ETH jumping 20% since August 4th and trading at $3,262 as of this writing.
Not much more needs to be said about regulation, so I’ll stop with that topic lest this blog become a filibuster. Governance, however, isn’t just for Capitol Hill, and while lawmakers debate blockchain technology – the foundation of crypto assets – continues to march forward. In particular DeFi is poised to surge and the maturing of Governance tokens – another asset class – is upon us. We’ll dive into that next blog but for those that want a sneak preview you can review our own Jake Ryan’s recent Harvard Business Review article, “Who Writes the Rules of a Blockchain” and get a head start.
That’s all for now. Be well, stay safe, and we’ll continue to Decrypt: Crypto for you!