Legislators may still be “learning the language of crypto,” in the words of Mick Mulvaney, President Trump’s former chief of staff, but the recent blocking of the infrastructure bill’s cryptocurrency amendment in the U.S. Senate is urgent proof that the industry needs to learn the language of Washington.
In light of this development, here are three lessons the crypto community should learn when it comes to the subtle art of government relations.
Engage With Regulators From the Outset
Emerging from the original anarchic roots of bitcoin, cryptocurrencies today are close to mainstream acceptance, with growing interest from institutional investors—as well as lawmakers and regulators whose responsibility it is to protect them.
Unfortunately, many players in the crypto space are only now coming to the realization that policy makers in Washington, and around the world, will play a critical role in their future. Whether they like it or not, government relations should have been a central component of the cryptocurrency industry’s business strategy from the outset—and now they are scrambling to catch up.
It should not have taken the perceived threat of a proposal that would give federal regulators authority to impose new tax reporting obligations on cryptocurrency brokers to force the crypto community to engage with the U.S. government.
As with any nascent technology, these conversations should have begun in earnest at its inception, with developers and regulators working together to apply the key benefits of this technology in a way that is safe, regulated, and sustainable.
The knee-jerk reaction of many vocal crypto industry participants on social media in early August simply bolsters the impression that the industry is only concerned about engaging with regulators when the possibility of taxation arises. Government relations is all about building trusted, bilateral relationships. As the old adage goes: You never want your first call to a lawmaker to be when you need to ask for a favor.
The fact that several prominent members of the crypto community even took to Twitter to launch a direct attack on the very senators they were seeking to influence ahead of the vote is demonstrative of a profound lack of awareness that constructive engagement is, by its very nature, dependent on good relationships.
Regulators Are Not the Enemy
Government policy, when crafted effectively and in collaboration with participants, can benefit the industry, not harm it. The crypto community must stop viewing policy makers as enemies and realize they could be their allies in driving forward the evolution of the industry.
Likewise, other players that would be considered part of the traditional financial system could also be useful allies. Policy debates often see odd bedfellows joining forces for a common goal. There are institutions that crypto companies would normally consider competitors that actually have common cause in Washington. The very banks they distrust could also provide custody services to large, regulated institutions that want to get involved in crypto, for example, so they could be the gateway to penetrating the institutional market.
Government relations are most effective when policymakers are brought along for the journey as the technology matures, rather than ignored or bypassed completely. Just look at how the scope of Facebook’s Diem project had to be massively scaled back, largely because of failing to engage the regulatory community from the outset.
If these important relationships are established, events like the recent development in the bipartisan infrastructure proposal will not catch the industry off guard. Instead, the industry would have been aware it was happening and given the opportunity to help shape the legislation before it was written and incorporated into the infrastructure bill. Successful government relations should only involve this kind of defensive crisis management part of the time—most of it should be about proactive relationship building.
The Future of Finance Will Not Be Completely Decentralized
The tech industry has always been wary of government intervention. In the early days of the internet, Silicon Valley made a concerted effort to keep lawmakers at arm’s length, despite it originating as a U.S. government innovation in the Cold War many years earlier.
The emergence of bitcoin took this disdain for centralized authority to another level. Satoshi Nakamoto’s original paper is as much a political manifesto as it is a technical document. Bitcoin was born of a frustration with the traditional financial system and a belief that governments, central banks and other established institutions had failed the very people they were meant to protect.
The reality, however, is that as much as the crypto community wants this technology to exist entirely outside of the existing financial system, it can’t. The disruption that the original, fully decentralized model seeks to cause will simply not be permitted by regulators whose job it is to ensure orderly and stable market conditions. The future of finance isn’t completely decentralized or completely centralized; it’s hybrid.
Ultimately, real change in financial markets is driven by collaboration. The global financial system has evolved slowly over millennia, and improvements to the way money and assets flow through it have almost always been achieved by successfully integrating a new technology with the existing infrastructure and institutions within it.
The idea that this system can be completely dismantled and replaced by crypto models has always been wildly overstated. The events of the last few weeks must serve as a wake-up call to this community that refusing to be involved in the regulatory conversation could eventually be the death knell to the cryptocurrency industry as a whole.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Charley Cooper, managing director at enterprise technology firm R3, is the former chief of staff/COO of the Commodity Futures Trading Commission.