Proof of State is the Wednesday edition of Fortune Crypto where Leo Schwartz delivers insider insights on policy and regulation.
On Friday, the chairmen of the powerful House Financial Services and Agriculture committees released a draft discussion bill to reshape crypto market structure regulation. The proposed legislation was not only groundbreaking for its rare collaboration between different House groups but also its scope, with some onlookers describing the effort as the most ambitious since the post-financial crisis Dodd-Frank Act.
The bill may not have had much political potential—it was crafted entirely by Republican staff, with no Democratic or agency buy-in—but chairs Patrick McHenry (R-N.C.) and Glenn Thompson (R-Pa.) were still able to bask in the briefest of news cycles, with novella-length threads from prominent crypto lawyers going viral on Crypto Twitter over the weekend breaking down the legislation.
That all changed on Monday, when the Gary Gensler-led Securities and Exchange Commission filed its long-awaited lawsuit against Binance in a Washington, D.C., district court, alleging a “web of deception.” Yesterday, the SEC completed a one-two punch with another lawsuit, against Coinbase, escalating months of legal posturing.
Crypto has become a golden bauble for politicians and bureaucrats to chase after, understanding that if they can hold onto it, they will enjoy a flood of engagement and attention, and, in some cases, donations—look no further than Biden’s bizarre swipe at “wealthy tax cheats and crypto traders” at last month’s G7 summit.
In November, lawmakers and agencies fought over the Sam Bankman-Fried news cycle, with the Department of Justice ordering the arrest of the disgraced founder the night before he was set to appear before the House Financial Services Committee, and the SEC and Commodity Futures Trading Commission rushing to file their charges as well.
This week was no different. The SEC’s lawsuit against Coinbase came the morning of a planned hearing on digital assets before the House Agriculture Committee, with Gensler even scheduling counterprogramming on CNBC and Bloomberg as Coinbase chief legal officer Paul Grewal was awkwardly set to testify. Lawmakers tried to keep the five-hour hearing on track with discussion about the bill, but as Thompson said in his opening statement, the elephant in the room was the SEC.
At the hearing, star witness and CFTC Chair Rostin Behnam declined on multiple occasions to discuss the lawsuits but still seemed to express his displeasure with the SEC’s approach to establishing the oversight of different tokens through lawsuits. “I’ll just say, this is a reason we’re here,” he said. “There is confusion, there’s uncertainty.”
As Justin Slaughter, the policy director of the crypto VC firm Paradigm, pointed out on Twitter, the lawsuits will likely keep House Democrats away from the negotiating table with McHenry and Thompson.
“The more major cases the SEC has active against major crypto players, the harder it will be for Democrats in the House to sign onto legislation on crypto,” he wrote. “Kills oversight, letters, testimony, legislation.”
We’re back at square one.
Leo Schwartz
leo.schwartz@fortune.com
@leomschwartz
