Is This a Crypto Regulatory Cold War?

What began as a classic clash between the nascent cryptocurrency industry and government regulators has morphed into a multifaceted conflict as crypto players splinter into nuanced segments who disagree on what the next decade should look like. The crypto industry, which once stood united against governments and agencies looking to impose regulatory frameworks, has fractured to make for a triple-front war complete with strife, power struggles, palace intrigue, and strange bedfellows straight out of a scripted drama.

This shift in dynamics has raised questions not only about the future of cryptocurrency and blockchain but also about the relationship between tech innovators and the government.

The way the discussion has evolved in 2023 has many asking: Are we engaged in a regulatory Cold War?

Regulatory Progress is Slow

Senators Sherrod Brown and Elizabeth Warren spent their summer drumming up as much noise as they could about the “high profile failures [that] resulted in lost consumer assets” and the “fraud, deceit, and gross mismanagement” they claim to see in the space.

In late July, senators Warren, Manchin, and Graham - now there’s a techno-literate bunch - co-sponsored a bill that would expand Bank Secrecy requirements to digital asset wallet providers, miners, and other participants in the crypto market. Such regulation would, they claim, help prevent crypto’s use in money laundering, drug trafficking, and terrorism.

It used to be that crypto would unify against such a move and explain blockchains are their crime-prevention friends, not foes. But no longer.

Instead, Coinbase CEO Brian Armstrong has sought common ground with regulators, seeking the elusive win-win that even the most knowledgeable and optimistic policy wonks know is unlikely.

Even the Senate’s so-called “crypto queen,” Senator Cynthia Lummis of Wyoming, knows the middle path is murky. In an interview this summer, Senator Lummis urged crypto players to compromise on the subject of crypto’s role in money laundering so there can be greater progress:

“If we can get this part of it addressed from the very beginning, before the regulatory framework is passed, then we’ve taken that concern off the table. And we can actually talk about digital assets in terms of how to regulate.”

But Armstrong’s good faith efforts, testimony, and willingness to explore the middle-ground were rewarded in a predictable way: the U.S. Securities and Exchange Commission filed suit against Coinbase in June, claiming the company was operating as an unlicensed securities broker. The SEC asked Coinbase to delist all assets outside of Bitcoin, something the company plans to fight in court.

The Regulatory Path from Here

Members of the U.S. House and Senate have taken their shots, drafted their legislation, and grabbed their headlines. But based on the one-sided nature of the discourse and how Armstrong (and others in the crypto lobby) have been treated, one has to ask: Is this just all talk?

The current political environment - one year out from a major election in the United States - is not one in which this will be a priority. The unfortunate truth is that legislative attention will go to those items that fulfill campaign promises or help score political points. Money laundering isn’t a subject with any kind of appeal in that way, and nor is additional financial regulation. We’ve all got bigger fish to fry, especially when the returns on such efforts are questionable at best.

So, where does that leave us in a regulatory cold war? Perhaps that’s the goal of the anti-crypto army in the House and Senate, where the threat of regulation and the occasional lawsuit gives the greater industry enough pause to self-regulate.

Crypto Purists Argue Regulation is Not the Path Forward

But all of that doesn’t register on the radar of the crypto-purists. While lobbyists spin their wheels in D.C., purists ignore the noise and do what they do: discuss private ownership of money, advocate for the tokenization of assets, and build.

Bruce Fenton, Managing Director of Chainstone Labs, cypherpunk, and former Executive Director of the Bitcoin Foundation, is one such purist. Fenton has pushed for “scrapping AML / KYC entirely” and responded to recent events by explaining the benefits of tokenization as a means of addressing the items at issue in the Hollywood strikes.

This is a viewpoint that is woefully underrepresented in Washington, DC.

Builders continue to build, too. The criticism of FTX for their misappropriation of customer deposits has been met by purists like ChangeNOW with a push for non-custodial wallets attached to their trading platform, and they’ve continued to expand the number of trading pairs while many others shrink.

Where things go from here is anybody’s guess, but one thing is for sure: the longer these debates last, the more these varied fronts develop. And the greater the fragmentation, the further we get from resolution.