Proof of State is the Wednesday edition of Fortune Crypto where Leo Schwartz delivers insider insight on policy and regulation.
Crypto is filled with buzzwords, but in the world of policy, two phrases have pervaded the zeitgeist in recent months: the classic “regulation by enforcement,” and a new one, “Operation Chokepoint.”
Reading the words over and over on Crypto Twitter can almost pound them into reality, so I thought it would be helpful to get the counterbalance of someone skeptical about the phenomena. Who better than Lee Reiners, a former New York Fed examiner and current policy director at the Duke Financial Economics Center, where he teaches a class on crypto law.
For those tuning into the recent spate of D.C. hearings, Reiners has been a stalwart presence, called as a witness to sit next to crypto company executives and throw cold water on some of their claims.
Over a video call yesterday, he told me that he first got interested in crypto while working at the New York Fed, trying to convince leadership in the halcyon days of 2016 that crypto was something to pay attention to. While he was fascinated by the subject, Reiners grew increasingly cynical about its applications and harms—especially when it came to money laundering and ransomware—eventually writing an op-ed for the Wall Street Journal in 2021 calling for a total ban.
While Reiners no longer pushes the position, resigned to its unfeasibility, he now spends his crypto-related energy arguing for an appropriate regulatory framework and guardrails—not too different from what many of his counterparts in the industry do as well.
The difference, obviously, is his interpretation of events on the ground. Something from his recent appearance at the House Financial Services Committee struck me, where he said that the only reason crypto companies aren’t coming in to register with the Securities and Exchange Commission is that many of their current structures (i.e. having functions of a broker-dealer, exchange, clearing agent, custodian, and market maker wrapped into one) aren’t allowed under current securities law, and it would be unprofitable to restructure.
In his view, the “regulation by enforcement” refrain was created by lawyers “telling the crypto industry want they want to hear.” Reiners does acknowledge that some companies like Coinbase need a different structure to be able to settle trades, and he included a proposal for a new entity called a “national cryptocurrency exchange” in his most recent testimony, which you can read here.
As for the “Operation Chokepoint 2.0” narrative, whereby federal agencies are coordinating to starve the crypto industry of banking access a la the 2013 DOJ initiative to secretly target “high-risk” industries like pornography and online gambling, Reiners says the difference is the current activity is all happening in the open, with everyone from the executive office to the Federal Reserve to the FDIC providing public speeches, reports, and actions. The original Operation Chokepoint was out of public view and wasn’t really about safety and soundness, he argues. “In the case of the federal agencies, when it comes to crypto, they’ve been very transparent and very public,” he told me.
Some readers of this newsletter may not agree, but it’s always helpful to mix up your perspective, just as Reiners does for his students at Duke. His go-to for a different viewpoint? Hester Pierce, SEC commissioner.
Leo Schwartz
leo.schwartz@fortune.com
@leomschwartz
