Hard truths: US lobbyists on why crypto legislation dies and key bills to watch in 2019

Regulators may fancy themselves as the ultimate crypto authorities, but when it comes to carving out core policies, it's the legislators calling the shots.

Yet according to those working on Capitol Hill, crypto legislation is in a sorry state. Ironically, the problem is not a shortage of bills. Around 400 blockchain and cryptocurrency-related state and federal bills have been introduced since mid-2017, according to Michelle Staton, founder of D.C.-based crypto lobbying firm Digital Asset Affairs. Instead, she and her peers are pointing the finger at companies in the space for failing to capitalize on the burst of activity on the Hill.

"The crypto industry has really dropped the ball," Staton tells The Block. "They totally can send lobbyists. But they don't...There are only a handful of people working on crypto policy full-time. "

As a result, key groups like Coin Center and the Chamber of Digital Commerce lack the necessary resources to prep an army of representatives to speak up when a bill reaches the floor.

"Many of the ~400 bills are dead not because they were voted down, but because they haven’t been voted on at all... They need to be advocated for relentlessly and on a large-scale basis, and they need to pass legislatures," she explains. "I can’t tell you how many state legislative committee hearings I've listened to where lawmakers brought a relevant bill up for debate and there was nobody from the industry to advocate for or against it."

While crypto firms engage frequently with regulators, these are largely siloed, individualistic efforts separate from a collective legislative call to arms. Yet given regulators are ultimately charged with enforcing the law, it also makes sense to focus on the latter, Staton says.

"The only thing that changes regulation is legislation. The IRS can’t change tax laws, the SEC can’t issue an amendment to the Securities Act or Exchange Act, the CFTC can’t amend the Commodity Exchange Act; substantive changes to these governing laws must go through Congress."

Arguably then, things have stagnated since the glory days of Wyoming and Delaware pushing through crypto-friendly legislation years ago.

Here, we outline the current state of crypto policy-making through the lobbyists' eyes, and look at what bills are in the works.

Piecemeal contributions?

While not all firms are asleep at the wheel, most at best pay lip service to lobbying.

For instance, one coalition headed up by Ripple has employed the Klein/Johnson Group to lobby Congress and regulators. Nonetheless, the various coalition members share a bill of just $25,000 a month (plus 10,000 XRP); suggesting it's not a material priority. Meanwhile, General Manager of IBM Blockchain, Marie Wieck, told The Block that the company contributes to global lobbying efforts in the space but specified "it's definitely not" a large part of IBM’s budget. Others like Overstock have reportedly reduced industry spend in recent years. Money's not everything, but it's certainly indicative.

"I don’t want to erase the excellent work that has been done," Staton says, "But it’s nowhere near the amount of advocacy work being done by other industries, most notably the traditional finance industry...There's a gross disproportion on crypto market cap and lobbying spend."

It's worth remembering that some firms may be hesitant because of the negative connotations around lobbying, which is often dismissed as rich men's bribery. Still, it's clear that without educating Congress beyond the small blockchain caucus, key bills will continue to go unnoticed while potentially damaging legislation may gain traction.

"We need to reassure lawmakers this industry isn’t all illicit finance and scams. We need to address its reputation...It’s way better to get sensible policy passed first than it is to try to overturn bad policy later," Staton explains. "The only thing moving more slowly than Congress on this issue is the industry [itself]."

Perhaps the most obvious exceptions are Coinbase, Circle, and the Digital Currency Group, all founding members of the national Blockchain Association, which launched in September last year. According to the association's filings, they've spent $410,000 on lobbying in total since launching, and have hired lead-lobbyist Kristin Smith as well as S-3 Group, which has around 20 lobbyists listed. It's a promising (albeit relatively new) initiative, with the organization’s flagship Token Taxonomy Act [detailed further below] heading back to the hill this legislative session.

The question is, will this group be able to carry the weight of the industry and its various demands - from security tokens to licenses - on their shoulders? Especially when it reportedly only has four representatives advocating for it.

"Every serious crypto company should have someone based in D.C. full-time," Staton recommends. "There's a severe lack of awareness."

Bills drowned in the abyss: The New Jersey example

New Jersey. The Garden State. Home to the Taylor ham, egg and cheese sandwich. The Jersey Shore. Bon Jovi. And new jobs in crypto, if a group of legislators in the state got their way.

In 2018, N.J. Assembly members Raj Mukherji, Gordon Johnson, and Annette Chaparro presented the Digital Currency Jobs Creation Act, which aimed to support "innovation in the burgeoning digital currency industry," as per a pre-filed bill draft. If passed, the 32-page bill could create a regulatory framework for cryptocurrency companies in the state, prohibiting local municipalities from levying taxes on certain crypto firms or restricting crypto transactions. It would also offer job incentives.

However, positive signs notwithstanding, this bill is now a thing of a past, says Staton.

"This bill has not progressed since its re-introduction in January 2018 [it was first presented in January 2016]. It's probably dead," she says.

It's not the first time this has happened. The New Jersey State Assembly and State Senate have introduced at least eight positive-leaning blockchain bills, and only 3 remain "in motion."

In defiance, employees at Consensys, DACC and asset-manager Crypto Crescent recently founded the Blockchain Association of New Jersey (BANJ), a non-profit organization focused on lobbying N.J. legislators to create a pro-innovation regulatory framework in the state. Nonetheless, they are still only operating part-time, and on a tiny budget.

In need of education: key bills to look out for

It's not too late to jump on the lobbying bandwagon. Indeed, the first two months of 2019 saw more crypto-related bills introduced than in all of 2018.

Today, on the federal level alone, there are about 20 relevant bills currently up for consideration. According to Staton, 11 of those bills can be classified as “positive or permissive" (meaning they are focused more on innovation than on consumer protection). Nine of them are "negative or restrictive" (focused on illicit security finance).

Particularly important bills include:

• The Token Taxonomy Act - This is a federal-level bill being reintroduced this legislative session. It aims to categorically define which tokens should fall under securities laws, potentially putting an end to ICO firms suspense and to exchanges' confusion about what they can list. Indeed, U.S.-based Bittrex and Poloniex recently gave in to regulators’ concerns and delisted tens of tokens. Listen to The Block's Frank Chaparro discuss the bill in detail on the latest episode of our podcast, The Scoop. It was first introduced during the last few weeks of the previous legislative session.
• The FINTECH Act of 2019 - This has received relatively little press coverage but aims to ensure fintech startups avoid surprise enforcement actions. Staton has been following the bill but says "it won’t pass if there aren’t more people on the ground actively working on it."

There is also a handful of relevant uniform bills (bills introduced across various states, which can independently choose to amend, approve, or dismiss them). Most notably:

• The Regulation of Virtual-Currency Businesses Act
• The Supplemental Commercial Law for the Uniform Regulation of Virtual-Currency Businesses Act.

Staton isn't holding her breath, but says increased attention on favorable legislation and policy is the key diagnosis.

"Crypto needs advocates."