Aura Kasih
A confluence of critical factors, from the impending midterm elections to a tragic law enforcement incident, has severely jeopardized the passage of bipartisan legislation designed to regulate the cryptocurrency market, leaving industry stakeholders bracing for a less favorable regulatory landscape.
The window for enacting a favorable cryptocurrency market structure bill in Congress has rapidly narrowed, with the approaching midterm elections casting a long shadow over legislative progress. As lawmakers pivot towards campaign mode, the intricate negotiations and bipartisan consensus-building required for complex financial legislation are increasingly being relegated to the back burner. This political shift portends significant personnel changes in Congress, potentially ushering in a new cohort of legislators less inclined to support the burgeoning digital asset industry.
Historically, midterm elections have served as a significant referendum on the incumbent president’s administration. Over the past eight decades, the president’s party has consistently lost seats in the House of Representatives in approximately 90% of midterm cycles. This pattern has held true for every president since Bill Clinton, who experienced losses in both the House and Senate during the first two years of his term. The greater the president’s current approval ratings, the more pronounced the electoral headwinds tend to be for their party.
In anticipation of these electoral dynamics, proponents of the cryptocurrency industry, such as Coinbase, had gambled on the continued political influence of their allies, particularly within the Republican party, potentially bolstered by endorsements from figures like former President Donald Trump. The hope was that this would counterbalance the influence of Democrats known for their skepticism towards the crypto sector, such as Representatives Maxine Waters and Senators Elizabeth Warren. Adding to their lobbying efforts, prominent figures like White House AI and crypto czar David Sacks, and even former President Trump’s son, Eric Trump, publicly attributed the legislative delays to the opposition of the traditional banking industry, notably during discussions at the World Economic Forum in Davos.
However, a deeply unsettling event – the fatal shooting of an intensive care unit nurse during an anti-immigration and customs enforcement (ICE) protest in Minneapolis – dramatically altered the legislative agenda. This tragedy ignited a firestorm of public outrage and immediately reoriented the focus of Washington’s political discourse, pushing policy debates, including those concerning cryptocurrency, into the background.
In the wake of this incident, Senate Minority Leader Chuck Schumer announced that Democrats would refuse to support any budget that continued to fund ICE within the Department of Homeland Security, creating the distinct possibility of a partial government shutdown. Crucially, this stance was echoed by several moderate Democratic senators, including Senator Patty Murray, a key negotiator for the current funding package. Senator Murray publicly reversed her earlier support, stating, "Federal agents cannot murder people in broad daylight and face zero consequences." This hardening of positions across the aisle has amplified partisan tensions, further complicating efforts to find common ground on other legislative matters.
The increasing partisanship was already beginning to infiltrate discussions surrounding market structure legislation. Cody Carbone, CEO of The Digital Chamber, a prominent trade association for the digital asset and blockchain industry, noted that opposition to the latest draft of the proposed bill primarily came from Democrats, alongside a couple of Republicans representing states with significant banking interests, such as Senator Thom Tillis of North Carolina, who is retiring due to his opposition to former President Trump. Carbone expressed concern that the Minneapolis incident would compel both parties to adopt more entrenched stances, consuming valuable floor time with highly divisive, existential debates, thereby sidelining cryptocurrency legislation.
Carbone further elaborated on the strategic importance of the crypto voter bloc, describing them as highly engaged, single-issue voters who prioritize their financial interests. While this demographic historically leans Democratic, their voting patterns have increasingly favored Republicans due to the perception that the GOP is more supportive of the cryptocurrency industry. He emphasized that the collective political contributions and voter enthusiasm generated by the crypto community could indeed influence election outcomes.
Despite these challenges, legislative efforts are continuing. The Senate Agriculture Committee, responsible for regulating commodities, is scheduled to convene for a markup of the Clarity Act this week, while the Senate Banking Committee, overseeing securities, appears to be in a stalemate. In discussions regarding the legislative landscape, it is understood that the core of the current impasse revolves around the ability of stablecoin issuers to continue offering rewards to consumers. Currently, platforms like Coinbase allow users holding stablecoins such as USDC to earn annual rewards, often exceeding 3.5%.
This practice has drawn significant opposition from the banking lobby. Banks are concerned that if stablecoin issuers and third-party holders can offer substantially higher yields than those available through traditional bank deposits, it could lead to a significant outflow of funds from conventional banking institutions. Depositors might opt to hold their savings in stablecoins to capitalize on the more attractive interest rates, thereby potentially destabilizing community and regional banks that offer minimal returns. While the proposed legislation, in its current form, does not explicitly prohibit banks from offering similar rewards, the banking industry is advocating for a complete prohibition on such practices within the stablecoin market structure bill itself. This demand has been a primary obstacle, preventing consensus and stalling progress, particularly within the Senate Banking Committee.
The potential loss for companies like Coinbase if these provisions are enacted would be substantial. While not representing their entire business model, the rewards program is a significant draw for users, fostering engagement and the adoption of stablecoins. For many individuals, the allure of earning significantly higher returns on their savings compared to traditional bank accounts makes stablecoins an attractive alternative. This use case is particularly relevant in the nascent stages of stablecoin adoption, where broader consumer acceptance is still being cultivated.
The limited timeframe before the election season intensifies presents another critical hurdle. The necessity for bipartisan support, requiring at least 60 votes in the Senate, underscores the challenge. A dedicated group of twelve Democratic senators has been actively collaborating with their Republican counterparts, and over a hundred Democrats in the House have previously supported similar measures, indicating a potential for bipartisan agreement. Negotiators on the Democratic side have reportedly secured concessions in the Senate banking bill, raising hopes for a compromise. However, as the election draws nearer, the prioritization of policy over political expediency diminishes, making timely passage increasingly improbable.
The cryptocurrency sector’s position in the upcoming midterms is complex. While not a primary concern for the average voter, its influence is undeniable. Crypto holders, though historically leaning Democratic, are characterized by their intense focus on the industry and their tendency to vote based on perceived industry support. This dynamic presents an opportunity for both parties to court a segment of the electorate that can sway close elections. The ultimate impact of the crypto vote will likely depend on whether market structure legislation remains a salient issue by November. If progress is made in the coming months, its salience as a ballot issue may diminish.
Looking ahead to the Senate Agriculture Committee’s markup, the actions of Senator Cory Booker are paramount. As the designated negotiator for ranking member Amy Klobuchar, Booker’s stance will be pivotal. The committee’s initial intention was to produce a bipartisan product, as evidenced by an earlier discussion draft. However, the most recent text released has not garnered bipartisan support. The outcome hinges on whether Booker can broker an agreement, with many Democratic senators reportedly deferring to his judgment. His approval could galvanize Democratic support, while his disapproval would likely result in a partisan vote.
In a scenario where Democrats gain control of either the House or the Senate, the passage of the Clarity Act would become significantly more challenging. The presumed chairs of key committees, such as Representative Maxine Waters in the House Financial Services Committee and Senator Elizabeth Warren in the Senate Banking Committee, have historically expressed skepticism towards cryptocurrency. Their leadership would likely prioritize enforcement actions and investigations into industry dealings, including those of the Trump family, rather than facilitating legislation aimed at promoting adoption. This shift could herald an era akin to the regulatory approach under SEC Chair Gary Gensler during the Biden administration, a prospect that industry stakeholders are keen to avoid.
The banking industry’s leverage stems from its broad support among Democrats and a segment of Republicans representing regions with substantial banking interests. Senators such as Thom Tillis and Katie Britt have voiced concerns about the potential impact of stablecoin rewards on deposit flight and competition with community banks. While proponents argue that existing banking regulations do not preclude banks from offering competitive rewards or issuing their own stablecoins, the industry appears focused on maintaining its established market position. The search for a compromise remains ongoing, with uncertainty surrounding the ultimate resolution.
Coinbase has not publicly indicated any shift in its position, though industry observers hope that the company will ultimately recognize the value of a passable, albeit imperfect, bill over complete legislative inaction. The prevailing sentiment among industry advocates is that engaging in the legislative process to improve the bill is crucial, especially given the potential for a less favorable political climate in the future. The fear is that failure to act now could lead to a recurrence of regulatory challenges, similar to those experienced under the current administration, and a regret over missed opportunities to shape the regulatory framework.
In a separate development, a Reddit post from user u/Kinmuan via the r/army subreddit featured an image of a Pokémon-themed machine within a Pentagon context, highlighting the often unexpected intersections of popular culture and government operations.
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