I found it weird that the US infrastructure bill included so much, often cacophonous detail, about crypto, but the ways of politics can be long-winded.
The topic was important enough so I sought out the best person who could help us understand what was going on. EV member, Kevin Werbach is an erstwhile regulator, with a stint at the FCC when regulating the Internet was under discussion in the mid-1990s. He is also the author of one of the clearest books on the blockchain. Kevin also edited EV in August 2019 when I was on holiday.
Please take a moment to thank Kevin and share his essay.
Since this piece was first published earlier this week, the Senate passed a $1.2 trillion infrastructure package as originally introduced a week before. The House of Representatives has the next vote, and there is bipartisan support for amending the bill, which might include amendments pushed for by the crypto community and lobbyists. For a timeline of what happened in the past two weeks, see this.
This essay was first published earlier this week to members of Exponential View. If you'd like to receive regular analysis of our shapeshifting world, become our member.
This past week in Washington DC, an unstoppable force met an immovable object. The result wasn’t what you might expect.
Blockchains and cryptocurrencies are often described as unstoppable, because their decentralized networks cannot be shut down and their smart contract transactions cannot be reversed. On the other side, policy-makers and regulators are seen as immovable, either because they bring to bear the coercive power of the state, or because they are simply too slow and dim-witted to adapt with the times.
Both views are exaggerations, of course. Progress occurs when discussions descend from ideologies to practicalities.
The immediate controversy was obscure: a provision in the Biden Administration’s mammoth infrastructure bill defining cryptocurrency exchanges as “brokers” subject to tax reporting. Tightening up crypto trading tax compliance would supposedly raise $30 billion to offset spending. The language, though, was vague. It arguably could have swept in miners, wallet software or hardware providers, and others who couldn’t do tax accounting for customers if they tried. Amendments were offered. Followed by counter-amendments. Followed by a flurry of lobbying and back-channel conversations. In the end, a compromise was reached, and then struck from the bill in an unrelated fight over military spending.
That the fight ended (for now) not with a bang but with a whimper should be cause for celebration. It’s proof that legislators, even in the deeply polarized United States, can come together across party lines to address a highly technical issue related to a fast-developing new industry. Two other implications stand out.
First, crypto has arrived as a political force. Tech policy may never be the same. It was 26 years ago that a motley collection of activists and public interest organizations literally turned most of the popular pages on the World Wide Web black to protest the US Communications Decency Act. Their advocacy during the legislative process attracted attention. It helped spur a bipartisan amendment, Section 230, that gave service providers protection to innovate, and became a cornerstone of internet policy. (Albeit a controversial one today!) A unanimous Supreme Court struck down the remainder of the law. Since then, the Internet community has had seats at the table on important policy battles.
Given its libertarian bent, the crypto community has often bridled at engaging with governments. Fortunately, organizations such as Coin Center, the Chamber of Digital Commerce, and the Blockchain Association, all of which were involved in the infrastructure bill negotiations, took a more pragmatic view. Given its growing financial heft, the crypto community can be a powerful force for pro-innovation reform and individual empowerment in public policy debates. That is, if it can overcome its tendency to dismiss legitimate concerns about money laundering, fraud, and financial stability as craven excuses to protect incumbents.
The second takeaway is that the real fight over crypto is yet to come. The true point of contention around the infrastructure bill wasn’t over shutting down Bitcoin or other digital assets (which no one was arguing), nor was it over whether crypto traders should have to pay taxes on their gains (which no one opposed). It was over something not mentioned in the bill at all: decentralized finance, or DeFi.
DeFi is a fast-growing sector of decentralized applications performing financial services functions such as lending and trading. From less than $1 billion at the start of 2020, DeFi protocols now manage roughly $60 billion of digital assets, with even bigger numbers when counting adjacent areas such as stablecoins, and non-fungible tokens (NFTs) for digital artwork and collectables.
While it’s an exciting market, it’s also a growing source of worry for regulators. DeFi protocols serve anyone indiscriminately (creating a challenge for financial crime and securities regulation), open up a host of vulnerabilities (resulting in hundreds of millions of dollars worth of losses already from hacks), create significant opportunities for scams, and generate interconnected risks that pose financial stability concerns.
The biggest problem with DeFi is that it potentially eliminates any touchpoint for regulation. Who is responsible when a service is a set of smart contracts running on their own on a blockchain? Janet Yellen’s Treasury department didn’t want to take DeFi regulation off the table with language that exempted developers and facilitators of those protocols. The battle is coming, though. In Europe, it’s already here, with the proposed Markets in Crypto-Assets Regulation (MiCA) framework.
Whether one is an enthusiast or sceptic of crypto, the genie is out of the bottle. DeFi services will be deployed. Even with a major crash, there will be hundreds of billions of dollars of digital assets available to interact with them. It is difficult to write language covering DeFi facilitators that doesn’t produce harmful spillovers in terms of government surveillance, speech regulation, and chilled innovation. This is the 20-year-old battle over peer-to-peer file-sharing reborn, with the stakes far greater.
The good news is that enough of the crypto community seems to be growing up. At the same time, governments are recognizing that the Trump Administration’s strategy of doing nothing is actually long-term harmful to nascent industries. Regulatory uncertainty creates what Nobel Laureate (and Secretary Yellen’s spouse) George Akerlof called the market for lemons; it removes the advantage of responsible actors, who are then crowded out by the bad apples.
For all its messiness and unsatisfying ending, the recent crypto controversy in Washington is a hopeful indication that we may yet follow a different path.
Kevin Werbach is a professor of Legal Studies and Business Ethics at the Wharton School, University of Pennsylvania, and formerly Counsel for New Technology Policy at the U.S. Federal Communications Commission. Kevin has spent the past two decades exploring major trends at the intersection of the Internet, digital media, and communications. He served on the Obama Administration's Presidential Transition Team and founded the Supernova Group. He has published four books, including The Blockchain and the New Architecture of Trust, For the Win: The Power of Gamification and Game Thinking in Business, Education, Government, and Social Impact, and After the Digital Tornado: Networks, Algorithms, Humanity.
- Decentralised Finance (DeFi) Policy-Maker Toolkit (WEF in collaboration with the Wharton Blockchain and Digital Asset Project, 2021)
- Banking Without Banks: Decentralised Finance is Coming (Exponential View Podcast, 2021)
- Bitcoin and the Future of Decentralised Finance (Exponential View Podcast, 2021)
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