From Florida to Wyoming and in 80% of state capitals, pro-cryptocurrency legislation is roaring ahead, propelled by the twin engines of a race to attract the jobs and investment that the young but cash-rich industry is dangling on the one hand and a vacuum of federal regulation that it has been pleading for on the other.
And it’s all riding on a cushion of lobbying dollars that the nascent industry has been spreading around as it attempts to catch up to its rapidly growing economic impact and acceptance on Wall Street as a — mostly — legitimate financial market.
In this state-level competition to influence and attract, there are growing signs that consumer protections and anti-money laundering (AML) laws’ teeth are falling by the wayside, The New York Times reported in an April 10 article about the speed with which states are willing to accede to the advice and requirements of crypto’s increasingly sophisticated lobbying efforts.
Citing the willingness of the Florida House and Senate to pass legislation designed to overcome a perceived threat based on a criminal court ruling in a recent AML conviction with minimal discussion, the article stated, “Florida’s warm embrace of the cryptocurrency agenda is just the tip of an aggressive industry-led push to position states as crypto-friendly beachheads.”
That’s a big change from just three months ago, when the crypto industry was still scrambling to build Washington, D.C.-focused industry associations, and large companies like the exchanges Coinbase and FTX were still building the lobbying arms that firms of their size have generally built up over years if not decades.
Read more: $20M PAC Launch Shows the $1.7T Crypto Industry Is Playing Catch-up on Lobbying
States Running Ahead
Crypto awoke to the scale of its own influence last fall, when a poorly written crypto tax reporting requirement in the massive and highly partisan $1 trillion federal infrastructure bill threatened — crypto advocates said — to push large chunks of it out of the U.S.
A miniscule item in a hugely controversial bill nonetheless convinced 99 senators to support a rarely-used tactic to amend a bill after it passed out of the upper house by unanimous consent. It failed when one senator — who said he actually supported the change — torpedoed it out of dudgeon that his own amendment to a far more important part of the defense industry segment of the bill was not given the same consideration. The House of Representatives were amenable, but the political imperative did not allow the bill to be delayed for a rewrite at the time.
See more: US Reps Hope to Amend Infrastructure Bill’s Crypto Rules
Meanwhile, many states are passing laws and enacting regulations that provide everything from regulatory sandboxes to experimentation with lower regulatory barriers and weaker consumer protections.
And in many cases, the legislators’ desire to attract the industry’s financial heft to their states is outrunning their understanding of the industry’s complexities, particularly as it relates to securities trading regulations and protections, but other issues as well.
The Times noted that Illinois State Sen. Sue Rezin introduced a crypto mining tax incentive bill that was “nearly identical” to a draft written by a lobbyist for Sangha Systems, a crypto mining firm setting up shop in an abandoned steel mill, hoping to make the economically depressed area a bitcoin production hub.
Rezin said she had introduced the bill at her party’s urging and “was not a crypto expert and hadn’t ‘heard too much’ about mining’s environmental impact” — which is enormous an causing an international backlash among environmentalists and even investors against bitcoin.
Read also: ESG Investors Double Down on Bitcoin’s ‘Staggering’ Pollution
Meanwhile, the U.S. Securities and Exchange Commission (SEC) has been cracking down harder and harder on what it sees as abusive and fiscally dangerous crypto practices that have raised comparisons within the agency, Federal Reserve and banking regulators to international groups ranging from the G20 to Financial Action Task Force (FATF), to the Financial Stability Board (FSB).
See more: FSB Sounds the Alarm of Crypto Assets’ Growing Threats
Wyoming’s Early Lead
Wyoming is far ahead in this race, with a former Wall Streeter and native daughter, Caitlin Young, championing the industry in her home state and successfully pushing the creation of the first clear and crypto-friendly regulatory framework in the U.S. back in 2019. Young is now CEO of Custodia, a state-chartered bank made possible by the regulatory climate she created in a state whose libertarian instincts match those of the crypto industry.
The state’s freshman senator, Sen. Cynthia Lummis, is a long-time bitcoin investor who has championed crypto at the federal level and recently convinced Sen. Kirsten Gillibrand of New York to join her in a rare bipartisan legislative effort.
Read more: Bipartisan Bill to Give CFTC More Power Over Crypto at SEC’s Expense
That bill is likely to be introduced within “weeks,” the two senators have said. That would put it a bare minimum of six months — and likely more like a year — ahead of the broader federal regulatory framework President Joe Biden instructed U.S. agencies to work together on creating in his March executive order on crypto policy
See more: Biden’s Executive Order Set to Fast-Track Crypto Policy
In that time, it’s becoming clear that many states will have enacted regulatory and taxation frameworks that will certainly influence the federal debate and likely lock in support of those states’ federal legislators.
Finding Its Legs
There’s an unspoken — in public — undercurrent of crypto’s willingness and ability to bypass regions that don’t create favorable rules. Nothing shows this more clearly than the ability of the multi-billion-dollar bitcoin mining industry to regroup and reestablish itself within a couple of months after China — where more than half the industry was located thanks to cheap power — abruptly booted the industry last summer.
The U.S. was the biggest beneficiary, with many of those miners setting up in areas where solar and hydro power are plentiful. And while a few states like New York have slammed the doors, many others like Texas have been fighting to attract them with legal support and tax incentives. As the China exodus made clear, they can jump around very quickly if those friendly climates change.
It’s also worth noting that as some 40 states push a crypto-friendly regulatory environment as federal lawmakers battle over the need for balance between consumer protection and creating a clear regulatory environment that doesn’t push crypto companies abroad — which they have been threatening a lot more than actually doing — there’s one state farther ahead than all the rest: New York.
The state Department of Financial Services’ landmark BitLicense created the toughest and most comprehensive regulatory framework for crypto in the country, and arguably the world, all the way back in 2015. While it gave a gold standard of regulatory compliance to companies that embraced it, such as Coinbase and the Winklevoss twins’ Gemini exchange, more than a few, such as Kraken, decamped to other states. And many crypto companies from exchanges to non-fungible token (NFT) sellers refuse to take New York clients.
As for other states, former New York Federal Reserve Bank supervisor Lee Reiners, a Duke University law school professor, told the Times he had objected to a bill passed in North Carolina exempting some crypto startups from consumer protection laws.
“States are being convinced you have to do this if you want to be competitive, so they’re rolling out the red carpet for crypto firms,” he said, per the Times. “There’s no one pushing back saying there are big risks here to your citizens, of money laundering, consumer fraud and tax evasion.”
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