The crypto policy landscape and how to educate policy makers about Web 3.0 | Ep. 5
How the crypto economy is engaging with legislators, what policy makers need to know about Web 3.0 and what role the U.S. infrastructure bill has played in kickstarting better cryptocurrency education.
Powered by the Filecoin Foundation, The Future Rules is hosted by Forkast.News Editor-in-Chief Angie Lau, alongside top legal mind in blockchain and Filecoin Foundation Board Chair, Marta Belcher. Together with some of the most renowned names in the industry as their special guests they dive into the future and the ethical issues that technology will raise, and how to address them today before they determine our tomorrow. From NFTs, to CBDCs and beyond, the team explores issues of civil liberties, law, compliance, human rights, and regulation that will shape the world to come.
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In this episode, Kristin Smith, who is the Executive Director of the Blockchain Association takes a look at the need for policy makers to really understand what cryptocurrencies can do and why professional advocates are essential in providing that education. She also considers the role the U.S. infrastructure bill has played in that process and why hitting the pause button on legislation could be of benefit for everyone.
The challenge of crypto policy: “The challenging thing is that most policy that we have to date has not actually come from Congress, it's come from the federal regulatory agencies, and that has some advantages… But the problem is, they're a little bit less directly accountable. A lot of these people are career people, or maybe they're political appointees. But there's a little bit of a less direct connection with users of cryptocurrency and so they often are only looking at a specific policy issue through the very narrow lens of whatever mission their regulatory agency has.” (Kristin Smith)
How bad headlines and misinformation are influencing policymakers: “Every once in a while, the bad headline is actually true, but a lot of times it's just a misunderstanding about how crypto networks work. So we have issues not just with policymakers, but with the journalists and the different publications that they work for... But, sometimes you can't change somebody's mind once they've sort of set out to do a story. But it is problematic because I think if you're a senior official at the Treasury Department or other agency, you just see the bad headlines and you don't necessarily get access to the good stories. So one of the things that we try to do is actually push out the good narratives through the press as well.” (Kristin Smith)
The crypto provision in the infrastructure bill: “We've known since the late spring that the White House and the Treasury Department were very interested in putting a provision in that bill that would direct centralized cryptocurrency exchanges, so these are companies like Kraken and Coinbase, to do information reporting, just like your stockbroker would at Charles Schwab. So that means that at the end of the year, these companies would send something that looks like a form 1099 to both the IRS and to their customers with information that shows how much tax they owe, because every time you trade cryptocurrency, there potentially is a capital gains implication there. So this is actually a good thing… But what they decided is, well, we need to help pay for this infrastructure bill, so out of the trillion-dollar bill, this throws in about 28 billion dollars.” (Kristin Smith)
The problem with the infrastructure bill: “The problem is what they did in this bill is, at the very last minute, without having any hearings or going through any sort of legislative vetting or even asking the stakeholders, like the Blockchain Association and others who've been working with the committee for a long time… what they did is they expanded the definition of a broker, so basically, the people who have the kind of organization that would have to do this kind of reporting, to include things like software developers, miners, stakers, other types of network validators - basically people that don't have customer relationships, that don't have access to the information required for information reporting, and so in some ways, it's almost like a de facto ban on these activities because there's no way for these types of organizations to comply.” (Kristin Smith)
The good news about the crypto provision: “The good news is that through this process, the authors of the amendment and even the Treasury Department themselves have said, oh, no, that's not what we meant this language should do. So we have a couple of things. One, there's a bunch of pressure right now that if this passes and they move to enact it, that they're not going to immediately try to make this apply to miners or software developers, or others. And so there will be political pressure for them to do this in a tailored way that really just captures centralized exchanges. So what we're working on right now is to try to figure out how to undo this legislation. And at this point that we're recording this, the infrastructure bill has not actually become law yet. So we do actually need that to happen before we can undo it. But we're looking at various legislative vehicles...” (Kristin Smith)
Angie: Welcome to the Future Rules. I'm Angie Lau. Editor-in-Chief and founder of Forkast.News.
Marta: And I'm Marta Belcher, chair of the Filecoin Foundation. In this podcast, we dive into the future of technology and the legal issues it raises. And today, we're going to dive into the crypto policy landscape.
Angie: So let's find out about the current policy climate, how the crypto economy is engaging with legislators and what policymakers need to know about Web 3.0, and of course, there is no one better to ask than Kristin Smith.
Marta: There really isn't, truly. Kristen is the executive director of the Blockchain Association. And we are so lucky to have Kristen as one of the board members of the Filecoin Foundation for the Decentralized Web. Really, truly, there's no one who's done more for blockchain on Capitol Hill than Kristen. So excited to get to talk to her today about crypto policy.
Angie: Speaking of D.C., you guys are thick as thieves in D.C. But when you guys were actually testifying, Marta, you in particular, I remember I think the end of July 2021, just a couple of months ago from this recording, and you were sitting in front of the Senate Committee on Banking, Housing and Urban Affairs to essentially answer the question - cryptocurrencies what are they good for?
Marta: It was so cool. Kristen and I were sitting in the Senate Banking Committee. And we it was really kind of crazy - there were actually three hearings going on at the same time in Congress about cryptocurrency. It was really wild, to think that we've gone from a world where legislators haven’t even heard of cryptocurrency, to being in a world where there's three hearings in one day - really a new era, I think, where you could see how legislators were actively engaging with cryptocurrency - understood, to various degrees what was going on, and why it was important.
And that's frankly in large part due to the work that Kristin's been doing on the ground every day - really working with policymakers, working with congressional offices and making sure that people in the space know what cryptocurrency is and why it's important.
Angie: And Kristin, you've just done excellent work in terms of turning what has really been predominantly an adversarial conversation, how did you all get us there?
Kristin: Yeah, well, I don't know if I can take full credit for getting us there. I think what's happened is that cryptocurrencies are becoming such an important role in our economy. There’s a lot of interest and there are also a lot of headlines about cryptocurrencies and crypto networks. And so naturally, Congress has been very interested in trying to figure out - What are these things good for?
And so we know Marta did a phenomenal job and it was really cool to see, because some of the stories that she told in her testimony were actually repeated by United States senators on the Senate floor a couple of weeks later. So it's just so important to have a presence and engage when these opportunities arise, because the hearings are a very important part of the broader policy making process.
And the more hearings that there are generally, the more opportunity there is for members of Congress to learn about these issues, which over time, we hope will inform a more sound and comprehensive regulatory regime for the cryptocurrency space.
Marta: Yeah, and Kristin, I mean, you do such an amazing job really explaining to members of Congress, to their staff and to other policymakers why cryptocurrencies matter and why this technology is so useful. And I think that was a big part of what I was trying to convey during the hearing was that cryptocurrency can really be the foundation for a better internet - that it can be an alternative to big tech and can put people in control of their data and protect privacy and security and preserve important information, and I was telling the story of Filecoin as part of that. Would love to hear how you think about engaging with policymakers and about Web 3 more generally.
Kristin: When I think of policymakers, it's a pretty broad category, right? I think a lot of the public interest we see in crypto policy comes from members of Congress. And the great part about dealing with policymakers who are elected officials is that they are very responsive and interested in having conversations, learning, figuring out what their constituents want, it's a very accessible part of the process.
There are also policymakers that are housed at different federal regulatory agencies, so not necessarily people who do enforcement actions or who do inspections or examinations as part of the regulatory process, but people who actually make policy within the confines of the jurisdiction of an agency. So, the challenging thing is that most policy that we have to date has not actually come from Congress, it's come from the federal regulatory agencies, and that has some advantages in that there are a lot of people at these agencies and they have the ability to devote specific experts who can really, over time, begin to understand what this technology is. So when we're having conversations with the regulatory agencies, we can go a lot deeper and get a lot more into the weeds on how the technology works.
But the problem is, they're a little bit less directly accountable - a lot of these people are career people, or maybe they're political appointees, but there's a little bit of a less direct connection with users of cryptocurrency and so they often are only looking at a specific policy issue through the very narrow lens of whatever mission their regulatory agency has. Right. Whether that be the FCC or the OCC or the Department of Treasury or the IRS. But when dealing with Congress, it's a very accessible group. Everybody wants to meet and learn about this stuff. There's always a few skeptics who will still meet with you, but you're not going to change their mind. But most lawmakers are very open.
The problem we have with lawmakers and the congressional staff, that work on these issues for them, is that they are working on a lot of different things and unlike the federal agencies, where you'll have somebody who's really spent time learning about this, you only get a few minutes with a member of Congress at any given moment. And so the biggest challenge we have is that in order to get to that conversation that Marta described, where you're talking about something like Filecoin and Web 3.0, and how crypto networks are going to be more secure and more private than what we have with traditional tech platforms, you first have to have a conversation about Bitcoin.
That might be multiple meetings, you then have to have a conversation about smart contracts and how they work and what they are. That can also take multiple meetings. And so there are just a lot of steps that you have to get to and you have to get beyond concerns about different financial applications and ultimately arrive at - well, let's talk about the internet piece of this, and so it's an ongoing challenge. And the number of people working on these issues in this space is growing. There are definitely good stories there that we can tell and that we want to share. It just takes a lot of time to get people to understand what a decentralized network is, and why it's better than the current structures we have in place today.
Angie: There's just so many avenues of education, but also blaring headlines splashed across newspapers or websites. And there's another narrative that policymakers are also having to field from stakeholders and constituents - and that's the characterization of the crypto economy as the Wild West. That narrative is very specific. It's fear driven and it is driving a lot of those regulators into a specific mindset. How do you respond to that? How do you address that, when you're faced with that kind of almost adversarial or counter-narrative to what's happening in the space?
Kristin: Yeah, no, there are definitely a lot of bad headlines out there and a lot of them are taken out of context - whoever wrote the article might not have a full understanding of what happened. And yet you do on occasion actually help some people that are committing fraud or that are trying to take advantage of people. Every once in a while the bad headline is actually true, but a lot of times it's just a misunderstanding about how crypto networks work.
So we have issues not just with policymakers, but with the journalists and the different publications that they work for. And then that's something we try to be a resource to as well. But, sometimes you can't change somebody's mind once they've sort of set out to do a story. But it is problematic because I think if you're a senior official at the Treasury Department or other agency, you just see the bad headlines and you don't necessarily get access to the good stories.
So one of the things that we try to do is actually push out the good narratives through the press as well. But this is actually why having Congress play a role is important, because Congress appoints people to these agencies, they have oversight over the agencies, they fund the agencies.
But for the first time, we've actually had individual users of cryptocurrency, people who are involved in the validation process of crypto networks, people who are providing or building and creating and maintaining software on these networks, and all of these people came together and they called their members of Congress, and it added up to quite a lot of phone calls, which was really wonderful. And so what we've been able to do just even in the past couple of weeks is Congress now realizes that, huh, OK, I'm starting to hear from my constituents, my voters on this and we're not going to just do whatever the agencies ask us to do, we're going to ask our own questions and we're going to push back and, hey, maybe Congress actually needs to sit back, look at the big picture, as opposed to the narrow missions that the individual agencies have, and see if there is a better framework here.
And I'm actually pretty hopeful that that will help Congress get to a better place, which will then make sure that the agencies aren't going too far astray and putting forth policies that might be damaging to the broader crypto ecosystem.
Marta: It's so funny because it changes so rapidly. And at a particular moment in time right now - things are different than they'll be when people are listening to this. But it's been such a huge moment, I think, for the cryptocurrency policy space. And so much of this work has been led by you, Kristin. So would love to talk a little bit about the infrastructure bill - what's happened so far and where we are now - the amazing response from the Blockchain Association and others in the crypto space.
Kristin: Yeah, well, I'll give a little background about what the crypto provision is in the infrastructure bill and why it's been so controversial. But, these infrastructure packages are largely a bunch of federal spending - to build roads and bridges and do other sort of projects. So it's really a spending bill, and Congress doesn't like to just spend money, they like to find a way to pay for that spending.
We've known since the late spring that the White House and the Treasury Department were very interested in putting a provision in that bill that would direct centralized cryptocurrency exchanges - so these are companies like Kraken and Coinbase - to do information reporting, just like your stockbroker would at Charles Schwab. So that means that at the end of the year, these companies would send something that looks like a form 1099 to both the IRS and to their customers with information that shows how much tax they owe, because every time you trade cryptocurrency, there potentially is a capital gains implication there. So this is actually a good thing.
This is something that the centralized exchanges also want guidance on, they've been asking the IRS for guidance on this. And at the Blockchain Association, we've been engaged working with Treasury and the IRS for a couple of years now, trying to figure out the best way to go about doing this.
And they've actually done quite a bit of work. But what they decided is, well, we need to help pay for this infrastructure bill, so out of the trillion dollar bill, this throws in about an extra 28 billion dollars. The problem is what they did in this bill is, at the very last minute, without having any hearings or going through any sort of legislative vetting or even asking the stakeholders, like the Blockchain Association and others, who've been working with the committee for a long time, what do you think about this language, what they did is they expanded the definition of a broker, so basically the people who have the kind of organization that would have to do this kind of reporting, to include things like software developers, miners, stakers, other types of network validators - basically people that don't have customer relationships, that don't have access to the information required for information reporting, and in some ways it's almost like a de facto ban on these activities because there's no way for these types of organizations to comply.
And - so what ensued? We went back and asked for changes at the moment we saw it and they said, nope, nope, the language is done, there's nothing that can happen. And over a period of a couple of weeks the industry got together and at one point we had over 120 organizations that had signed onto a letter that opposed this provision. We had over 40,000 individuals who called their US Senators asking for it to change, As this pressure sort of continued to build, we had a couple of champions - Senator Ron Wyden from Oregon, Cynthia Lummis from Wyoming and Pat Toomey from Pennsylvania came together with an amendment, that would have addressed this.
That amendment was introduced. There were speeches on the Senate floor. All of this began to build. But what happened is they were very eager to get this bill done, and before they could get a vote on the amendment, they actually voted to end debate, meaning there was only 30 hours on the clock left. And at that point, you can only do something if you get unanimous consent. So now we got to get all 100 senators on board, so there was a compromise that was put together with Treasury and the bill sponsors and the sponsors of the prior amendment that everyone had rallied around and ultimately that was offered on the floor, and a Senator from Alabama objected because he couldn't get a vote on his amendment either, and if he wasn't going to get a vote, he wasn't going to let anything else go through.
So that was sort of the anticlimactic ending. And we got a lot of senators that maybe had dismissed cryptocurrency that are now really wanting to learn about it. So it is a happy ending in that I think we as an ecosystem have gained the respect of legislators, but we still have this problem that we need to get the bill fixed. And so that's ongoing. I never thought I would hear people talking about like proof of stake or proof of work on the Senate floor, but there were debates about that, which was pretty amazing.
Angie: Just hearing that and experiencing that - the frustration around the world, quite frankly, on the intransigence almost, right as it almost seemed to have been resolved. So where are we now? I understand that obviously it still needs to be fixed, but the clock is ticking.
Kristin: The good news is that through this process, the authors of the amendment and even the Treasury Department themselves have said, oh, no, that's not what we meant this language should do. So we have a couple of things; One, there's a bunch of pressure right now that if this passes and they move to enact it, that they're not going to immediately try to make this apply to miners or software developers or others. And so there will be political pressure for them to do this in a tailored way that really just captures centralized exchanges.
So what we're working on right now is to try to figure out how to undo this legislation. And at this point that we're recording this, the infrastructure bill has not actually become law yet. So we do actually need that to happen before we can undo it. But we're looking at various legislative vehicles, some which might be signed into law early this fall, some that might be towards the end of the year. If there had been a vote in the United States Senate, I think we would have had at least 55 people in the Senate that would vote in favor of that and we would have won. So, yeah, it's an incredibly frustrating process.
But I don't want the community to be discouraged by that, because it took this crisis to bring everyone together and to show that they were an active political force. And going forward, people aren't going to pull a fast one on the industry again or the ecosystem. They just know that it's going to cause too much trouble. They're going to hear from too many people and they're not going to let that happen again.
Marta: That's such a great summary of where we are with the infrastructure bill and where we're going moving forward. But, you know, I do think that the infrastructure bill is sort of part of an overarching growing trend, not just in the United States, but for governments around the world to really increase the amount that cryptocurrency is surveilled, frankly, and the amount of information reporting that happens around cryptocurrency. So this is really just one piece of the puzzle. Do you want to talk a little bit about the other initiatives from governments and organizations around the world to really push for cryptocurrency to be the subject of a lot more surveillance.
Kristin: So the cool thing that I think all of us who are involved in the crypto ecosystem like about it is that you can have all of these transactions on a peer to peer basis. You don't need to have a centralized entity. So if I want to store files today, I have to go to Amazon Web services to do that. But if I'm a business and I want to store files and, using Filecoin, I just go straight with whoever is providing the storage on the other end and there is no big centralized intermediary. Similarly, with financial services, you can transact on a peer to peer basis and today most of those transactions go through a bank or some other financial institution that is heavily regulated, that has a lot of reporting requirements for when people move a certain transaction threshold.
But crypto networks allow you to just transact with somebody directly and sort of surpass all of that and so from the regulatory perspective, they like having all of this information. It doesn't actually always work, which there was a situation with something called the FinCEN files that revealed that there was still a bunch of money laundering activity that was occurring at banks, even though they're collecting all of these reports, nobody really knows how to handle all the data, and it's kind of a mess, but it's a system that everyone can point to that makes them feel like they're keeping tabs on all the bad guys.
But the problem is the crypto world shows up and it enables these direct transactions and regulators, who have basically deputized banks and other financial services agencies to be kind of the enforcers of their policy, they don't like that. And so it's trying to figure out, what is our goal here? Our goal is we want to make sure people are transacting with people that are good actors, but you don't need to - there's ways to do that where you don't need to know somebody's home address and birthday and telephone number and Social Security number. And so it's trying to get regulators to look at what are the actual problems we're supposed to solve.
And let's come up with a new way that makes sense for this technology to reach those goals. But trying to put like we saw with the tax bill, this reporting restructure on software protocols that aren't set up that way, that doesn't work. And so similarly, on the anti-money laundering side, that is kind of a similar theme.
This is why we need to do so much education to get people to really understand the power of the networks - the fact that there is a lot of transparency in the transactions and in the fact that you can build tools on top of them, that can help address different policy concerns. But you have to have the understanding of the technology before you can develop those policies.
Angie: And we are talking more than just U.S. regulators here - I mean, these are global regulators around the world that reference each other. They see the innovation, they want to encourage it. I mean, that's what we're experiencing here in Asia as we see across the landscape. To be sure, there are a lot of regulators who are starting to get stricter, to enforce, and do all of those things. So it really is that education beyond Congress, it's also being referenced by the rest of the world. In your view, Kristin, how much of this has become international education for regulators? And which country do you think has the most crypto friendly legislation?
Kristin: So there's a series of organizations that bring together regulators in different companies and try to sort of harmonize the policies across different countries. So we have the Financial Action Task Force that looks at money laundering, we have the Financial Stability Board that's looked at stablecoins and the OECD that has looked at tax policy. And so a lot of these policies are being recommended by these international coalition of regulators. And then they make those recommendations and then everyone goes home to their own country and tries to get those enacted.
And sometimes that requires new regulatory authority or legislative authority. But if we look around the world, I think the countries that are doing everything the best are probably the countries where everyone goes to do their business. I think Singapore comes to mind as being fairly crypto friendly. Bermuda has been very crypto friendly. Cyprus - some smaller countries that have seen having good crypto policy as a competitive edge. But there's a big effort underway in Europe right now that's looking at a regulatory framework. From the U.S. perspective, some of the challenge that the U.S. policymakers collectively have had is that unlike other jurisdictions around the globe, there are so many different regulators, there isn't one place that you can go to get kind of one policy that looks at everything.
So it's really hard to get a comprehensive policy enacted in the US unless Congress gets involved. So countries that have a single uniform financial regulator have tended to be further ahead on this. But, we are seeing crackdowns, particularly in China - they have taken a lot of steps to make it difficult to be a miner. But interestingly if you look at Bitcoin, for example, since China banned Bitcoin, transactions in Bitcoin have actually gone up in China.
So that's the hard thing about these networks, is you can't just rein them in because they're you can access them wherever you have an internet connection. And people like that. And so I think these networks will persist. It's just better, I think, to have a good regulatory framework that allows us to meet all of our public policy goals and not have it operate in the shadows.
Marta: Yeah. Right - exactly. I really think it's important for us to not blame the technology here.
Angie: The education continues. I'm wondering - you mentioned that there is a presidential working group right now on stablecoins. Have you both been tapped?
Kristin: So the president's working group on stablecoin is made up of different regulators that have been convening, and at the Blockchain Association, we've been invited to present and contribute ideas along with some other stakeholders. I would say this is an improvement over how this working group has worked in the past, because at the end of the last administration, there was guidance that was put forth by the president's working group on stablecoin, and they didn't meet with any stakeholders at all.
So this is good. But it's still, as I mentioned before, with members of Congress, they're so accessible. And you can sit down and you can have conversations and you can say things back and forth. You know, when you're dealing with the president's working group, it's like, all right, you will show up on this day and you have five to seven minutes to say this and there will be no Q&A. So,I do think we're going to see some recommendations come together around stablecoins - just the growth of stablecoins since a year ago, I think a year ago, it was under 20 billion dollars. And now we're close, close to 120 billion dollars.
I mean, it's just been sort of this hockey stick growth in the stablecoin market, and there's a reason for that. The market has decided that these are really useful and valuable, and you can program these dollars to do really cool things in a lot of ways. And so I don't think this is a genie that can be put back in the bottle. But we do anticipate some regulatory recommendations coming from the president's working group before the end of the year.
Marta: There's so much going on in the space that you are dealing with on a day to day basis. And a lot of defense - dominantly a lot of defense these days. What are your wish list of things that you would like us to be able to push forward if we were able to play some offense in that cryptocurrency policy space?
Kristin: I think the first would be, I would love to just hit pause and have the time to do the level of education that we need to get this right, because all of this at the end of the day, comes down to education. I think there are very few people that once they've spent a lot of time understanding what Bitcoin is or what the Ethereum is or what Filecoin is, once you really get into it, most people are like, oh, wow, a light bulb went off - I get it, this is really cool. So, yeah, education would be one. And there's a lot of organizations that are coming together to help amplify education efforts, which I think is wonderful. We need more of that. I would then say, number two; we need a more robust set of advocates professionally. Most industries in Washington have trade associations and companies that have professional policy people and lobbyists.
And that is starting to come together. But even the people working on this space now, they need the education because they don't necessarily have the tools to do the educating themselves. And so we're trying to play catch up on that as well. And then the one piece I think is missing is finding a good way for individuals who are just participating in these networks or who are users or just fans of crypto, we need to find a way for those people to be engaged in an ongoing basis, to build relationships with their congressmen, to show up at town hall meetings and ask questions and we need to find a way to keep that community active and organized. I think there are a lot of efforts, there's a lot of interest right now, a lot of resources coming in and so I think we'll build this out over time.
But, yeah, I would give anything to just hit the pause button and play catch up on some of these other fronts, because then we would be in a situation where we weren't just being reactive to things, but actually proactively putting good ideas out there and not finding ourselves in the situation like we were in August with the infrastructure bill.
Angie: I think we should retitle this podcast, “crypto for policymakers and anyone who wants to educate themselves on this space”. Kristin, that's exactly what happened between you and Marta today. I'm so thrilled that you were able to join us for our podcast today. Kristin Smith, executive director of the Blockchain Association, got to thank you for joining us.
Kristin: No, thanks for having me!
Marta: Thank you so much, Kristen and Angie.
Angie: You can listen and subscribe to The Future Rules anywhere you get your podcast fix and find the full series on the Forkast website. We hope to meet you all here again in the future.