Trying to get the best government you can

Hello and welcome to the FT Cryptofinance newsletter. This week we’re taking a look at the US elections.

The crypto market may already be looking ahead to life under the next US administration, but in the meantime it is still hoping that the first set of digital regulations will be passed before November’s presidential elections.

Executives are excited that at least one of a number of crypto regulations will be passed. Among the bills floating around are some on stablecoins and a central bank digital currency.

But the biggest is so-called FIT21. It sets out the difference between a digital security and digital commodity, and specifies which federal agency would regulate them. The bill has passed the House of Representatives and is now with the Senate.

Michael Novogratz, chief executive of Galaxy Digital, told a Piper Sandler conference in New York on Wednesday that “there’s a chance it gets done this year”.

He added that Senator Chuck Schumer, an influential voice, had told him personally only on Monday that “if a decent bill happens . . . he will push it to a vote and President Biden won’t veto it”. (Comments courtesy of my colleague Jennifer Hughes)

“There’s a complete shift in body language and practice from our regulators. It gives me huge confidence that if it’s not this term, it’ll be the first three months of the next administration, no matter which administration wins. We’re going to get better regulation and that’s going to unleash another monster wave,” said Novogratz.

US crypto companies have long complained that domestic policy is made ad hoc by regulatory enforcement or case-by-case court rulings.

Underlining the point, Paxos, a stablecoin operator, on Wednesday announced a first-of-its-kind stablecoin that pays holders interest for depositing their money in the token. 

But Paxos — which is based and regulated in New York and has gone out of its way to adhere to whatever regulators demand — will run it out of an Abu Dhabi subsidiary. This stablecoin, called the Lift Dollar, is not available to US customers. 

Charles Cascarilla, chief executive of Paxos, said the lack of regulatory clarity on stablecoins had been a deterrent. “We didn’t try to go to the US [regulators]. When we have, we have received pushback from the SEC.”

But the chances of any of these bills passing remains a long shot. In a research note this week Nikolaos Panigirtzoglou, an analyst at JPMorgan, said the stablecoin bill was most likely to get through while FIT21 “is unlikely” to happen before the election.

Faced with this uncertainty, others are taking a more calculated approach. On Monday, Coinbase, a US exchange, said it had given $25mn to Fairshake, a SuperPAC or fundraising vehicle able to spend unlimited amounts supporting or opposing candidates.

Fairshake has an explicitly pro-digital assets approach. Already Fairshake has run ad campaigns that denigrate anti-crypto candidates, even though the word “crypto” rarely appears in the adverts.

Days earlier, the SuperPAC received a $25mn donation from Ripple, a US cryptocurrency operator, taking its fundraising (including its affiliates) to $161mn and making it one of the largest of these vehicles.

The timing is unlikely to be coincidence. Last thing on Friday the White House had vetoed the nullification of an accounting rule. Had the rule — known as SAB121 and covered in this newsletter two weeks ago — been annulled, it would have become easier for banks to hold digital assets for customers. 

Brian Armstrong, chief executive of Coinbase, has made his strategy pretty clear. “The best way to get regulatory clarity in democratic countries is to elect pro-crypto candidates on both sides of the aisle, and to vote anti-crypto candidates out of office,” he wrote in a blog post.

It was, he added, a bipartisan approach. “The House and Senate help determine what crypto legislation gets passed, among other things, so growing the number of pro-crypto members is critical,” he wrote.

If nothing else, it shows how fast crypto has grown up. A decade ago it wanted to shun regulation; next the industry wanted to explain its benefits. But that got nowhere and having Sam Bankman-Fried as the market’s face in Washington really didn’t help. Now it has decided to play by the same rules as everyone else. 

Crypto companies have also learned other opinion-shaping tactics, such as using questionable surveys. Coinbase repeatedly says that “52mn Americans own crypto” — a claim that is based on an online survey by a polling company in mid-2023 using a sample size of just 2,700 people.

Armstrong laid out Washington’s sometimes tougher, brass-knuckles style, according to Charley Cooper, a former Washington lobbyist. “It’s about getting your person elected, knocking your opponent off, and getting rid of people who are going to be problematic.”

Even so, digital asset companies still spend less than other financial services firms. Jeff Yass’s Susquehanna International has contributed $70mn and Ken Griffin, founder of hedge fund Citadel, nearly $60mn in 2023-24, according to fundraising data compiler OpenSecrets.

As a whole, the financial services industry has spent more than $500mn in each of the past 10 years. The biggest contributor to last year’s total of nearly $600mn was the insurance industry, OpenSecrets found.

Sadly for the plutocrats, money doesn’t guarantee results: the financial industry wanted rid of SAB121 and yet it still stands.

There is an irony that crypto, a libertarian dream, realises it needs the financial and legal system to validate its existence, and is hiring expensive consultants to do what others already do in Washington as routine.

Nevertheless, the crypto industry has now recognised this is what it must do, has understood that the game does not end, and is thinking about the long haul. As Omar Little, the gun-toting anti-hero in The Wire, said: “The game is out there and it’s either play or get played.”

What’s your take? Email me at philip.stafford@ft.com

Weekly highlights

• A group of US lawmakers called on President Biden to secure the release of Tigran Gambaryan, the Binance employee held in Nigeria since February. They described Gambaryan, who reportedly has malaria, as being held hostage and said “we fear for his life”.

• Robinhood agreed to buy European cryptocurrency exchange Bitstamp for $200mn, accelerating the US retail broker’s expansion outside its home market.

• Japanese crypto exchange DMM Bitcoin said it would raise $320mn from the companies that are part of its parent DMM Group to help repay customers after $305mn of client money was stolen last month.

Data mining: The lazy days of summer

Crypto can be traded at any time of day, any day of the year, but in reality it is subject to the same ebbs and flows as other markets. Activity is subdued at weekends and major religious festivals. And during the summer people go on holiday. As data from Kaiko Research shows, the drop-off in activity in the third quarter is very pronounced. Let’s see if the introduction of US spot bitcoin ETFs changes this dynamic too.

Cryptofinance is edited by Laurence Fletcher. To view previous editions of the newsletter click here.

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