Crypto reform coming to US in 2023, says former White House chief of staff
In the United States, crypto reform legislation isn’t the province of a single political party, and that’s why a former U.S. Congressman, who also played a prominent role in the Trump administration, believes that passage of a federal “digital assets” law this year is a real possibility.
“Democrats aren’t all on one side; Republicans aren’t all on the other side,” said Mick Mulvaney —budget director and later acting White House chief of staff from January 2019 to March 2020 — further explaining:
“I do think in this Congress, which has got functionally about 14–16 months left before it sort of shuts down before the next election cycle, you will get a meaningful piece of legislation on blockchain/crypto — what we’re referring to collectively as digital assets.”
Mulvaney’s government resume is long and varied. In addition to six years in the U.S. House of Representatives, he was also director of the Office of Management and Budget from February 2017 until March 2020, as well as special U.S. envoy to Northern Ireland — a post from which he resigned on Jan. 7, 2021 — the day after protesters inspired by President Donald Trump attacked the U.S. Capitol Building. Mulvaney is now a strategic adviser to Astra Protocol, a Switzerland-based Web3 Know Your Customer (KYC) platform.
Centralized versus decentralized finance
Mulvaney has an interest in Bitcoin (BTC) and blockchain technology going back nearly 10 years. In 2016, he co-founded the Congressional Blockchain Caucus. Today, he says decentralized finance (DeFi) protocols have some key advantages over their centralized counterparts. Moreover, it’s now possible to integrate key compliance processes like KYC and Anti-Money Laundering into DeFi platforms — something that would reassure regulators.
“There’s a weakness in the system when it comes to the centralized and a strength that comes from decentralized finance,” he said. Much of the fraud commonly associated with the crypto space can be attributed to centralized entities, from Mt. Gox to FTX. DeFi, in his view, brings additional layers of transparency that make engaging in fraudulent activities more difficult, “and over the past decade has proved that it is the better system […] Even regulators are beginning to understand this,” he told Cointelegraph.
‘Regulators dropped the ball’
When speaking with one of the Trump administration’s leading financial managers, it would be hard not to ask about the current banking crisis. Silicon Valley Bank (SVB) was arguably ground zero in this upheaval, with some critics — most notably Senator Elizabeth Warren — criticizing the Trump administration for loosening banking regulations that might have averted SVB’s bankruptcy.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, enacted in response to the financial crisis of 2007–2008, introduced the idea of “stress testing” large U.S. banks deemed too big to fail. However, the testing threshold was revised in 2018, which meant SVB and Signature Bank (also troubled) were no longer considered “systemically important financial institutions” subject to stress testing. As Warren wrote in The New York Times:
“Had Congress and the Federal Reserve not rolled back the stricter oversight, S.V.B. and Signature would have been subject to stronger liquidity and capital requirements to withstand financial shocks.”
Is Warren correct that the previous presidential administration was at least partly to blame? “It would have happened anyway,” answered Mulvaney. “The changes in 2018 were relatively narrow in scope. Essentially, it took banks under $250 billion [in balance sheet assets] out from the very highest level of regulation.”
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Silicon Valley Bank was still subject to bank regulation, just not the very highest. Meanwhile, duration risk, marked by taking short-term deposits and investing them in long-term assets — arguably the key factor in SVB’s downfall — “is one of the simplest, most basic things that the SEC [Securities and Exchange Commission], the FDIC [Federal Deposit Insurance Corporation] and the Fed are supposed to look at,” said Mulvaney. “The very lowest levels of regulation should have caught this.”
“The regulators dropped the ball,” he stated, emphasizing that this was a management failure “at a bank that happened to deal with crypto customers. This was not a crypto-induced problem, and I think that’s important to note.”
Crypto has bipartisan support
Why is Mulvaney so optimistic about the prospects of federal crypto or blockchain legislation this year? Despite everything one hears about political polarization in Washington DC, especially in Congress, some issues remain “fairly bipartisan,” he explained. One is antipathy to China. Another is suspicion of Big Tech. But a third is “an interest in crypto and blockchain.”
Take the House Financial Services Committee, on which Mulvaney once served. Its Digital Assets Subcommittee is chaired by Republican French Hill, a crypto and blockchain supporter, but the subcommittee also includes crypto supporters on the minority (Democrat) side, including Ritchie Torres, who spoke with Cointelegraph earlier this year about the prospects for digital assets reform legislation.
Bi-partisanship extends to the U.S. Senate, too, where Republican Cynthia Lummis and Democrat Kirsten Gillibrand jointly introduced the Responsible Financial Innovation Act in 2022, which aims to create a regulatory framework for digital assets. Mulvaney explained:
“You have a group of people in both parties who just want to know more; they’re interested in the topic, they want to educate themselves.[…] That’s where we are right now with crypto and blockchain.”
Next generation of compliance
Astra Protocol, where Mulvaney now serves as a strategic adviser, bills itself as the next generation of compliance — a decentralized KYC Platform for Web3 that “brings the financial regulatory standards for 155+ countries and over 300 sanctions and watchlists to the crypto industry without sacrificing anonymization.” KYC is a process that many banks and businesses use to verify the identity, suitability and risks of potential customers.
But how can one ensure anonymity when trying to verify identities and conduct background checks?
“I think everyone has come to realize that there are different levels of it [anonymity],” said Mulvaney. “For example, I can tell you who I am. And once you know who I am, you can prove to me who you are so that we can deal with each other with a certain level of trust without telling the whole rest of the world who we are.”
Astra Protocol states that its “patented technology” calls upon experts from major global firms to verify a user’s credentials and perform KYC checks of prospective DeFi users. This enables DeFi protocols to adhere to data privacy regulations without accessing investors’ personally identifiable information. The idea is something like zero-knowledge proofs.
“Astra Protocol has no idea what transpired between a DeFi protocol and a regulatory delegate,” the project states. A DeFi project or exchange will be able to know that you are who you say you are and, importantly, that “you’re not on a sanctions list. You’re not a drug dealer. You’re not a child pornographer, you’re not a bot,” added Mulvaney.
Coming to grips with new technology
So far, the Biden administration hasn’t identified itself as a great friend of cryptocurrencies and blockchain technology. Were things different in the previous administration? What, if anything, was being said about crypto inside the White House?
“It was pretty much what you would see in the general public at the time,” answered Mulvaney: “‘We’re not really sure what it is. It’s a new piece of technology […] What are the opportunities,’” and so on.
He recalled conversations on the subject with then-Comptroller of the Currency Joseph Otting, “trying to figure it out.” For instance, which agency should take the lead in regulating digital assets: The Commodity Futures Trading Commission (CFTC), the SEC or a banking agency? “It was unsettled,” recalled Mulvaney. “It was unknown because it was so new.” But that was appropriate for the time. “You don’t want ironclad positions,” especially when adjusting to new technology.
Anyone but Gensler
“I hope that’s what the current [Biden] administration is doing,” i.e., engaging in open-minded discussion. “I get the impression that [SEC chairman Gary] Gensler is sort of dominating the debate. He’s clearly a [crypto] skeptic. I don’t think that’s particularly healthy. I don’t want my regulator taking sides.”
Which government department or commission should take point on crypto? Mulvaney leans toward the CFTC, which would regulate crypto more like a commodity, not a security. Many in the crypto community would probably favor CFTC primacy too. He added:
“I just don’t think Gary Gensler has the mindset to do that [act objectively]. So right now, put me down as supporting anybody other than the SEC because Gensler is still there.”
What does the former acting White House chief of staff think about crypto and blockchain’s long-term prospects? Does the technology have an Achilles heel that will hinder global adoption?
It will not fail because it is (allegedly) being misused by criminals and terrorists, he stated. Lawmakers are slowly learning something that law-enforcement agencies have known for a while. “Crypto is actually a lot better for law enforcement than cash — because while it’s anonymous, it’s still traceable,” said Mulvaney.
The biggest resistance will likely be from “countries that are worried about their own currency being replaced.” He doesn’t include the U.S. in this group, but European Union countries might be candidates. “The Europeans may worry that eventually the euro may be replaced by a digital currency because the euro is sort of held together with needle and thread.”
What about the International Monetary Fund (IMF), which has warned its 190 member countries against making Bitcoin and other private money “official currency?” Is that a responsible position for the world’s lender of last resort?
“No, I think they’re way out of their lane,” answered Mulvaney. The IMF was set up to do a certain thing, “which is to lend money to countries to help them to develop.” Whatever a country wants to adopt as its official currency “is really not the IMF’s business.”
He believes in the “competition of ideas” and “if you get a certain country that wants to adopt Bitcoin or any particular cryptocurrency, I think that’s fine. It’s helpful and could spur more innovation.”
Bitcoin and gold
Mulvaney’s interest in Bitcoin goes back almost a decade and came about “by accident.” He was attending a conference on the gold standard, and “there was a young lady there, talking about something I’d never heard about before, which was Bitcoin, and explaining how it was fixed in total number,” and so on.
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“I remember turning to her at the end of the conference and saying, you know, it’s not exactly the same as the gold standard, but it’s got some interesting parallels. I’d like to know more about it.” They spent some time discussing the new technology, its history, how it worked, and where and how it was being adopted. “I was just fascinated.”
What specifically drew him to Bitcoin? “The value is set by technology.” Later on, as head of the Office of Management and Budget, he saw firsthand “what we’ve done to the currency. I’m very much aware of how much of it [U.S. dollars] we’ve printed over the course of the past ten years.”
“That scares me to death. So to have something that the government cannot, at least in theory, change the value of unilaterally by fiat — that appealed to me, and I think it appeals to a lot of people.”