Coinbase's D.C. push is starting to woo Democrats

It's not only participants in the crypto market who are expressing frustration with the current leadership at the Securities and Exchange Commission.

Earlier this week, we witnessed a vigorous questioning of Chairman Gensler by members of Congress from both sides of the political spectrum. Democrat Ritchie Torres delivered the most interesting testimony during a five-minute exchange. The congressman from The Bronx sought clarity from Gensler regarding the precise definition of an investment contract, which ultimately determines which financial instruments fall under the purview of the SEC.

During the exchange, Torres raised the question of whether an investment contract necessitates an actual contract, highlighting that the seminal SEC vs. Howey case involved two contracts. Torres's line of questioning echoes a concern shared by many crypto proponents: that the term "investment contract" has been interpreted too broadly, potentially enabling the SEC to classify anything Gensler deems a security as such.

"I worry that when it comes to crypto, your interpretation of the term 'investment contract' has no limiting principle and therefore is susceptible to arbitrary and capricious enforcement actions," Torres remarked.

Gensler did not provide a clear answer to Torres's query regarding whether an investment contract requires some form of contract to be considered a security. Such a requirement would likely protect digital collectibles and other types of digital tokens from being classified as investment contracts. Gensler argued that existing law grants the agency broad authority. Nevertheless, Gensler could not cite a case in which an investment contract lacked an actual contract.

"I find it telling that you can't cite a single case," Torres countered.

Growing divide

In many respects, Torres's position on the issue reflects the divide between the administration and Congress concerning crypto. While the SEC is pursuing legal action against Binance and Coinbase, Congress is increasingly adopting a more pro-crypto stance. Politicians on Capitol Hill, spanning both the Democratic and Republican camps, are pushing back against Gensler and adopting more crypto-friendly positions. In addition to Torres, there are Republicans like Patrick McHenry and Majority Whip Tom Emmer.

Coinbase is actively working to garner support from influential leaders in the House, including House Financial Services Committee ranking member Maxine Waters, as per individuals familiar with the firm's efforts in Washington, D.C. Torres's resistance to Gensler reflects Coinbase's growing influence among House Democrats.

"The Senate is less receptive, but there's a positive trend," one source noted in reference to lobbying efforts. The firm is directing considerable attention to Ohio in an attempt to gain the support of Senator Sherrod Brown, who chairs the Senate Financial Services and Housing Committee. Waters and Brown will play pivotal roles in advancing proposed legislation related to stablecoins and crypto.

Coinbase is not alone in its endeavors, as the Blockchain Association, Ryan Selkis, and a16z are also providing their support.

Concurrently, members of the crypto community are increasingly engaging with Washington, D.C. Galaxy Digital's Mike Novogratz and venture investor Travis Scher were both in the capital recently.

I will be in Washington, D.C. during the second week of October. Please let me know if you'll be in the area and would like to discuss developments related to D.C. policies and regulations.

This first appeared in Frank Chaparro's biweekly The Scoop Newsletter. Sign up now.