NEW YORK, NY – FEBRUARY 07: Dan Roberts, Brad Garlinghouse, and Andy Serwer attend the Yahoo … [+]
From banning “non-compete” clauses to re-requiring “net-neutrality” to hyperinflating the costs of taxpayer-funded infrastructure with extravagant union giveaways, the Biden administration has overseen a massive expansion of the regulatory state. But amid this regulatory incontinence, which sows uncertainty, suppresses innovation, and retards investment and growth, there are encouraging signs that Congress, the courts, and US entrepreneurs are fed up with rule by executive fiat.
Take, for example, the escapades of the Securities and Exchange Commission. Since assuming power, Biden’s approach to cryptocurrencies and related technologies has been to delegate and defer to an activist SEC and its crusading chairman, Gary Gensler. Chairman Gensler portrays the crypto industries as “rife with hucksters, fraudsters, [and] scam artists,” which, he seems to believe, excuses him from proposing and promulgating concrete rules, in compliance with statute, for the industry to follow. Instead, Gensler sees crypto companies as undeserving of such regulatory clarity, choosing to keep them off balance through a “regulation by enforcement” approach – aggressively suing crypto companies for non-compliance with securities laws without ever articulating what “compliance” requires.
In the absence of clear, legal pathways, companies in the digital asset space have taken their innovations and expertise to friendlier shores. Governments in places such as the United Kingdom, the European Union, Singapore, and the United Arab Emirates have already established regulatory frameworks and their economies are certain to reap the benefits of the resulting financial and related technological innovations.
Meanwhile, other companies have chosen to remain in the United States and figure out how to raise and deploy the resources needed to bring some sanity to the domestic regulatory environment. Indeed, the politics around the issue have begun to change. Last week, even political allies such as Senate Majority Leader Charles Schumer (D-NY) and former House Speaker Nancy Pelosi (D-CA) voted to rein in Gensler’s expansive claims of regulatory authority over digital assets.
On May 21, with the support of 12 Democrats including Schumer, the Senate voted 60-38 to overturn Gensler’s controversial Staff Accounting Bulletin No. 121 (SAB21) – an SEC guidance document that makes it very difficult for financial institutions to provide custodial services for cryptocurrencies. Last October, the Government Accountability Office had already ruled that Gensler had skirted the statutory rule-making process with SAB21 by failing to notify Congress as required under the Congressional Review Act.
Then, on May 22, with the support of 70 Democrats including Pelosi, the House passed by a vote of 279-136 the Financial Innovation and Technology for the 21st Century Act, known as FIT21, which removes any doubt that digital assets are commodities to be regulated by Commodities Futures Trading Commission and not securities to be regulated by the SEC. This very issue had been in the courts in lawsuits brought by the SEC against Coinbase and Ripple Labs.
Last July, Judge Analisa Torres of the Southern District of New York ruled that the XRP token, which Ripple uses in its cross-border payments product, is not a security when traded on public exchanges. Ripple CEO Brad Garlinghouse was also personally targeted by the SEC in the lawsuit, accused of “aiding and abetting” in what turned out to be legal XRP sales. “I’m going to be honest, it was kind of a dark time,” Garlinghouse recalled, before thousands of jubilant supporters celebrating Ripple’s legal victory, of the night in December 2020 when he learned he was being sued for hundreds of millions of dollars
Shortly after Torres’ ruling, the SEC dropped its case against Garlinghouse but the ordeal appeared to toughen his resolve to take the fight well beyond the courtroom. The victory certainly contributed momentum to the effort to pass FIT21 and it burnished Garlinghouse’s heroic profile among a grassroots army of crypto supporters, who have mobilized not only to fight the SEC but to influence the 2024 elections.
As recent court decisions and legislative developments have begun to deliver greater regulatory clarity, the experience has brought Garlinghouse and other industry leaders together to acknowledge the stakes and to support the campaigns of candidates who believe in crypto and blockchain technologies. Ripple is one of the top funders of Fairshake PAC, a political action committee that has amassed one of the largest 2024 election campaign war chests.
“Team Ripple is putting a stake in the ground,” Garlinghouse wrote on X in December when news broke of the huge sums raised by Fairshake and two affiliated PACs. Their first big target was Rep. Katie Porter (D-CA), a rising Democratic star and staunch Gensler ally who was running for Senate in Ripple’s home state of California. She faced an onslaught of negative ads and finished a distant third in the primary.
Fairshake has widened its field of play to other races around the country, backing allies from both parties but putting significant pressure on Democratic Senate candidates in Ohio, Montana and other swing states. Schumer’s and Pelosi’s change of tune in last week’s votes suggests the PAC approach may be working in Washington. Even the White House seems to be backing away from its threat to veto FIT21.
Republicans are also paying attention. Presumptive presidential nominee Donald Trump is courting the crypto companies, while emphasizing the Biden administration’s mistreatment of the industry. In an election year where margins of victory could be tight, neither party can risk alienating an economically vital and increasingly engaged constituency.
Despite the personal ambitions of zealous regulators, and the damaging turf battles they wage, American innovation is difficult to suppress. Determined entrepreneurs like Garlinghouse find ways over and around hastily erected obstacles. Eventually markets do their work and the economic benefits of new technologies catch on. It was true of the internet three decades ago. Watch as it becomes true for blockchain technology as the future unfolds.
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