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Big crypto players have turned against a landmark bill to regulate digital assets, which industry lobbyists had been pushing in a rush to pass a favourable rule book before the midterm elections.
The bill known as the Clarity Act, a sweeping piece of legislation to govern the multibillion-dollar US crypto sector, was delayed in the Senate this week after Coinbase chief executive Brian Armstrong publicly withdrew his support.
Infighting over the legislation, a version of which passed the House of Representatives in July with support from crypto lobbyists, imperils an effort to move the bill through the Senate before lawmakers turn their attention to this autumn’s congressional elections.
“There’s definitely an assumption that crypto is not going to have a friendly Congress post-midterms,” said Gabe Rosenberg, partner at law firm Davis Polk. “This is the shot.”
Discontent around the legislation marks the first big political setback for the American crypto industry since Donald Trump returned to the White House.
His administration has made crypto a national priority and sought to implement crypto-friendly regulations, as well as pardoning well-known crypto figures and signing the so-called Genius Act to regulate stablecoins.
The Clarity Act introduces a sweeping regulatory framework for digital assets, ranging from bitcoin to obscure derivatives, and determines which agency among the country’s securities and commodities regulators should have oversight.
Crypto companies have had to battle bank lobbyists over the bill, with the main dispute relating to the rewards that are paid to people who own stablecoins, digital tokens pegged to the US dollar.
Banks have fought to limit those rewards — arguing that allowing individuals to earn more interest on dollar-linked tokens than they do in their bank accounts will lead to “deposit flight” and dent lending.
Bank of America chief executive Brian Moynihan, on an earnings call this week, said a movement of funds out of the traditional banking system would “reduce lending capacity of banks, [which would] particularly hurt small and medium-sized businesses” compared to larger borrowers that have access to other sources of debt.
US banks were “spending a lot of money in DC” lobbying to stop crypto companies from being able to pay interest, said Geoff Kendrick, global head of digital assets research at Standard Chartered, adding that the banks “know they’re in trouble” when it comes to competition.
Tokens that represent ownership of stocks are another point of friction, with crypto players crying foul at a last-minute addition of language that would make it harder for these assets to get permission to trade.
Jonathan Jachym, global head of policy and government relations at crypto exchange Kraken, said the changes “created some unnecessary frictions and distraction”.
Meanwhile, decentralised finance groups are fighting against politicians and more traditional market makers over obligations related to anti-money laundering and other controls. They argue these rules would make it more difficult for software developers to build crypto systems that do not have centralised oversight, hampering innovation.
These disputes contributed to Coinbase’s last-minute change of heart and led to a Senate committee review, known as mark-up, being called off the night before it was due to proceed.
“There’s a lot of forces at play here, and that was coming together at the last second for a bill that was still being negotiated hours before the mark-up itself,” said Ron Hammond, the head of policy and advocacy at Wintermute.
Democratic politicians have been pushing for limits on public officials profiting off ties to crypto businesses — a move that partly targets the Trump family’s extensive crypto interests.
Crypto lobbyists fear that if Democrats gain seats after the midterms in November, or take control of either chamber of Congress, the digital asset sector will face a much more sceptical environment.
The fate of the nearly 300-page bill is uncertain as the Senate is on recess and no deadline has been set for another committee vote.
“It’s still got momentum, and that’s the main killer or driver here,” said Hammond. “The second this bill loses momentum politically, I would consider it dead in the water, but right now, it’s got a lot of momentum from all those outside pressures, including the White House.”
Additional reporting by Joe Miller
