By: Patrick Woodall
The crypto industry has continued its legislative onslaught as the Senate begins considering giving a federal seal of approval to crypto trading. The Senate Banking Committee majority seems hell-bent to deliver total giveaways on legislation that threatens to undermine the integrity of the securities market, expose investors and customers to unprecedented risks, and imperil the economic future of people everywhere, whether or not they own crypto.
The crypto industry is deeply involved in crafting this legislation, but Senate Republicans will need Democratic support to pass the bill, giving them the opportunity to push back against the crypto industry’s demand for total supplication from the Congress. A dozen Senators have taken a step towards leveraging their power by releasing a set of crypto principles that they state need to be included in any crypto legislation to garner their support.
These are the Democrats that Senate Banking Chair Tim Scott (R-SC) must persuade to pass his priority bill. Almost all backed the deeply flawed stablecoin legislation pushed and signed by President Trump earlier this year, but now they could wield their bloc of votes to make meaningful and critical improvements to this legislation without compromising — or block legislation that falls short of providing the protections and safeguards the group has identified as crucial to any meaningful crypto legislation.
Getting it Right
But the devil will be in the details. The principles contain many worthy goals, but gauzy rhetoric alone will not deliver for the public. Modest nods to these principles would only be window dressing, allowing another badly flawed bill filled with giveaways to powerful crypto billionaires to become law. The principles will only work as a framework for crypto legislation if the final bill incorporates strong, binding, and enforceable legislative language that would achieve the laudable goals included in the principles.
The reason for clear, prescriptive language is simple: the financial regulators tasked with writing the rules to implement laws are captured by the crypto industry’s strongest allies. President Trump has appointed zealous deregulators who want to let the crypto billionaires get away with bilking small investors and distorting market integrity. They will only implement strong rules if the legislation forces their hands through tough and prescriptive legislative language that clearly delineates precisely what regulatory protections are needed and what the agencies must do to accomplish these safeguards.
Red Lines or Broken Promises
These dozen Democratic Senators must use their leverage and unity around these principles to insert robust legislative language as a red line that compels the Senate crypto boosters to incorporate real, needed protections into the legislation. These Democratic principles cannot become a starting point that just get watered down in the final legislative negotiations. That would only expose the public and the economy to unheralded financial risks. Instead, the principles must be the absolute floor of requirements for any crypto legislation to gain the bloc’s support.
The Democratic crypto principles cover a lot of ground but some of the most salient include:
Incorporating Robust Investor Protections: The principles include several mentions of preserving consumer protection rules for digital platforms and maintaining state consumer and investor protection rules (including the Consumer Financial Protection Bureau which Chair Scott and the crypto industry has already tried to shut down). In contrast, the crypto industry proposal backed by Chair Scott aims to shift most crypto oversight to the less robustly supervised derivatives and commodity markets, which were never designed for small everyday investors and do not have the same kinds of protections, required disclosures, custody safeguards, or deceptive marketing rules. Further, their legislation pre-empts state securities, banking, and consumer protection laws, leaving customers exposed to fraud, mismanagement, and deceptive practices without any state oversight that has already been so critical in holding crypto’s bad actors to account.
These legislative provisions as currently drafted sit in stark opposition to the principles’ stated desire to provide consumer and investor protections. It is necessary that the bloc of 12 Senators seek required disclosures and longstanding rules on market manipulation or conflicts of interest equivalent to what exists for investors in traditional markets to meet the spirit of the consumer and investor protection principles they claim to be a priority. Half-hearted language that calls for “adequate disclosures” falls short of the principles stated intentions. Any legislation must deliver the same level of investor and consumer protections that are found in the stock market.
Confronting Crypto Corruption: The principles tacitly acknowledge the unprecedented crypto corruption emanating from the White House. The Trump family crypto empire surged to $6 billion the first weekend in September and Forbes stated the president’s current $7 billion net worth was amassed “largely by cashing in on crypto.” The Trump family’s crypto venture is more than just an outrageous profiteering abuse of power — it is that obviously. It also effectively prevents any meaningful regulation, oversight, or enforcement of any crypto rules on any crypto asset traded on the president’s crypto platform. No regulator is going to lay down the law if it will mean cutting into the president’s crypto profits. The principles document merely proposes to “limit elected officials and their families from issuing, endorsing, or profiting from digital assets while in office,” but the limitation should be absolute. It must totally prohibit crypto corruption, and should explicitly prohibit the President, Vice President, and their families from doing so.
Getting Illicit Finance Out of Crypto: A few decades in, one of the primary use cases for crypto continues to be laundering the proceeds from criminal activity. As Paul Krugman has written, crypto is for criming. In 2023, the world’s largest crypto exchange Binance and its CEO paid $4.3 billion to settle federal criminal money laundering charges for knowingly and willfully allowing sanctions evasion with accounts in Iran, North Korea, and Syria, and laundering the proceeds of darknet transactions, ransomware, and scams. The anonymous, high-speed, and cross border transactions facilitated by crypto help criminals and terrorists evade law enforcement and international sanctions, and those protections are especially needed for decentralized finance (known as DeFi). The principles recognize the need to apply tough anti-money laundering rules to crypto. It’s imperative for the bloc to demand that these rules must apply to the entire crypto ecosystem, not just some exchanges while excluding the decentralized finance operators, to be effective anti-money laundering provisions.
Standing Up for Getting it Right
The Democratic authors of the crypto principles are uniquely situated to force the Republican majority to incorporate strong protections for people and the economy. That leverage must not be squandered for half-measures and promises of improvements over time. This moment requires bold and courageous leadership.
When the Democrats shared a more detailed set of proposals that applied anti-money laundering rules to DeFi, the Republican Senate majority leaked the blueprint to the crypto industry which vetoed any restrictions on illicit finance on DeFi platforms. A spokesperson for one of the Democrats told Politico that “They asked for paper and substance, and we delivered. They then turned around and leaked our proposal.” This should put the authors of the Democratic principles on notice that the crypto industry is unwilling to let the Republicans negotiate over the crypto legislation. The crypto industry is emboldened by the success of its political influence and bolstered by President Trump’s unfettered crypto corruption. The industry wants Congress to surrender to every whim and demand that will allow it to maximize profits at the expense of everyone and our economy.
The dozen Democrats must stand firm. This legislation must not be written in haste at the behest of Trump and the army of crypto industry lobbyists. The fate of the financial system, the economy, and trust in the Congress demands a sober and deliberative legislative process. These Democratic Senators have taken important steps to address the many perilous shortcomings in the industry-crafted crypto bill. They must reject any legislation that fails to meet the necessary standards they laid out. Anything else will be a craven capitulation to industry power and money and a grave disservice to the people who elected them to serve.