DealBook newsletterCrypto is Minting LobbyistsA growing web of trade groups aims to influence policies that will aid (or squash)

It opens a new front in the war over how cryptocurrency will — or will not — be regulated. And the battle lines are just beginning to be drawn.

Cryptocurrencies are still mostly held as speculative assets, but some experts believe Bitcoin and related blockchain technologies will become fundamental parts of the financial system. To many, Coinbase’s successful debut, which valued the company at $86 billion, far more than operators of stock and bond exchanges, is a signal that this transformation is already well underway. At the least, investor interest in Coinbase forces traditionalists to take digital currency and associated tech — once easier to dismiss — very seriously.

But Coinbase’s success may also invite more attention from regulators. “We’re going to increasingly be having scrutiny about what we’re doing,” Brian Armstrong, Coinbase’s chief executive, said on CNBC. “We’re very excited and happy to play by the rules,” he added, but regulation of crypto should be on a “level playing field with traditional financial services.”

Crypto companies often boast about their ability to disrupt the status quo. But Washington is different. Lobbyists follow an established playbook. Indeed, one way Coinbase has been able to grow to its current grandeur is by recognizing that even currency renegades had to play nice with officials to help create a hospitable regulatory environment that enabled its executives to become billionaires. Since 2015, the company has spent more than $700,000 on government lobbying, according to the Center for Responsive Politics.

It has long cooperated with other crypto businesses to advance its causes, though some industry observers say the launch of its new trade group may reveal a fissure that could become a deep divide.

Players, observers, lobbyists and the lobbied alike consider this a critical moment for crypto and its influencers. Succeeding or failing to persuade officials now will determine whether regulation allows the digital gold rush to accelerate or slows it to a sputter.

What’s at stake?

Here are four of the big issues keeping crypto lobbyists busy:

Reputation. The impression that crypto facilitates crime is voiced with some frequency by lawmakers and regulators, and it remains a significant hurdle to legitimacy. The Crypto Council’s first commissioned publication is an analysis of Bitcoin’s illicit use, and it concludes that concerns are “significantly overstated” and that blockchain technology could be better used by law enforcement to stop crime and collect intelligence.

Reporting requirements. New anti-money-laundering rules passed this year will significantly expand disclosures for digital currencies. The Treasury has also proposed rules that would require detailed reporting for transactions over $3,000 involving “unhosted wallets,” or digital wallets that are not associated with a third-party financial institution, and require institutions handling cryptocurrencies to process more data. The Financial Action Task Force, an intergovernmental watchdog and standards body, recently provided draft guidance on virtual assets that would require service providers to hand over further information.

Securities insecurities. When is a digital asset a security and when is it a commodity? Not technically a riddle, this question has puzzled regulators and innovators for some time. Bitcoin and other cryptocurrencies that are released via a decentralized network generally qualify as commodities and are less heavily regulated than securities, which represent a stake in a venture. Tokens released by people and companies are more likely to be characterized as securities because they more often represent a stake in the issuer’s project.

• The Securities and Exchange Commission sued Ripple Labs in December, accusing it of selling unregistered securities in the form of a token called XRP. Ripple insists that XRP is a commodity. A decision in this case may prove to be a watershed for determining how to properly characterize cryptocurrencies in the future.

• This week, an S.E.C. commissioner, Hester Peirce, published an updated “safe harbor” proposal that would give developers a grace period to issue a token without fear of mischaracterization and to keep regulators informed. “The idea is to give people a three-year runway,” Ms. Peirce said.

Catching up with China. The Chinese government is already experimenting with a central bank digital currency, a digital yuan. China would be the first country to create a virtual currency, but many are considering it. Some crypto advocates worry that China’s alacrity in the space threatens the dollar, national security and American competitiveness.

For more, see our previous weekend edition about the future of crypto regulation.

Meet me in the lobby

“With any new industry, figuring out Washington isn’t easy,” said Ms. Peirce, the S.E.C. commissioner. Entering a heavily regulated industry like finance and talking about technology that few officials understand only compound the difficulty for the crypto crowd.

Since joining the S.E.C. in 2018, Ms. Peirce has been a vocal supporter of blockchain both in the halls of power and in crypto insider circles, sharing her thoughts on hot topics like when there will finally be a Bitcoin exchange-traded fund in the United States. (Not soon enough, in her view, but perhaps soonish.)

As the sector matures, some things will get easier even while the landscape of players gets more complex. Blockchain businesses will increasingly speak to regulators who understand their language, Ms. Peirce said, like the new S.E.C. chair, Gary Gensler, a former M.I.T. professor who taught crypto classes and was coincidentally confirmed on the day that Coinbase listed.

It might be a different story for lawmakers. An aide for the Senate Banking Committee chair, Sherrod Brown, Democrat of Ohio, said they engaged frequently with different blockchain advocates, “but from our perspective cryptocurrency has a lot of problems.” There are consumer protection and environmental concerns, worries about the risk to the financial system and unsupported claims about how crypto democratizes finance, the aide said.

“Generally people interested in crypto aren’t working two jobs trying to put food on the table,” she said, and the recent speculative crypto frenzy shows “it’s really not for the everyday working American.”

Somewhat similarly, Representative Tom Emmer, Republican of Minnesota and member of the Congressional Blockchain Caucus, said he worked with many effective crypto advocates to develop what he thought were smart policy proposals. One of the biggest obstacles to progress, however, is his colleagues’ ignorance of technology, he said; that has to be addressed in order for rules to be effective.

“Our entrepreneurs need clear and consistent guidance from regulators and legislators, but they just aren’t getting it because of a lack of education in government,” Mr. Emmer said. “The tremendous amount of regulatory uncertainty that comes as a result of this lack of understanding has had a real impact on crypto, blockchain and all-around fintech development in the United States.”

The crypto lobby landscape

Some of the key players:

• Association for Digital Asset Markets: Founded in 2018, 17 members. Crypto investment firms and related service providers that agree to adhere to a code of conduct for market participants. “Developing industry best practices that facilitate safe, secure and efficient digital asset markets.”

• Blockchain Association: Founded in 2018, 35 members. Blockchain-native companies, once including Coinbase, divided into working groups on a wide range of topics. “The unified voice of the blockchain and cryptocurrency industry.”

• Chamber of Digital Commerce: Founded in 2014, 200-plus members. Mix of crypto and traditional financial services, with groups ranging from token frameworks to smart contracts and accounting standards. “The unified voice for the blockchain technology ecosystem.”

• Coin Center: Founded in 2014. Think tank with a policy and education mission, with credibility from (relatively) long experience on the scene. “The leading nonprofit focused on the policy issues facing cryptocurrencies.”

• Crypto Council for Innovation: Founded in 2021, four members (Coinbase, Fidelity, Paradigm and Square). Bridging the crypto world and traditional finance. “Unlocking the promise of crypto.”

• Virtual Commodity Association: Founded in 2018, two members (bitFlyer and Gemini). Nonprofit, co-founded by the Winklevoss twins, seeking to establish a self-regulatory organization for crypto marketplaces. “Fostering consumer protection and market integrity for virtual commodity marketplaces.”

What a new trade group brings to the crypto lobby

Coinbase has long cooperated with other crypto businesses to advance their common cause in Washington. Before the Crypto Council, it was part of the Blockchain Association, which rallied with other advocacy groups and companies to oppose rules for digital wallet transactions that Treasury Secretary Steven Mnuchin proposed last year to prevent money laundering. After flooding the government with comments and letters and threatening to sue over the process, which they said had rushed through onerous requirements on crypto that didn’t apply to cash, they won more time and the opportunity to lobby a new administration on the issue.

Last summer, Coinbase quit the Blockchain Association after members voted to include Binance, a rival exchange.

Paul Grewal, Coinbase’s chief counsel, says the new group represents an evolution in how Coinbase conceives of advocacy. “We’re now seeing that crypto and finance as a whole need to speak in one voice,” he said. The Crypto Council also plans to focus on global policy more than other trade groups do. But its biggest differentiator may be its members, who are big players.

For this reason, the Crypto Council is likely to have outsize influence in Washington. Its emergence also illustrates the possibility of a splintering of interests, but the trade groups all say cooperation among crypto lobbyists is likely to continue even as their ranks multiply. Mr. Grewal insisted that the associations were all complementary.

The industry, in its brief history, has overcome many obstacles, convincing doubters of its promise, said Marvin Ammori, a Blockchain Association board member and chief counsel at Uniswap, a decentralized crypto exchange.

The challenge now is to get all the key officials up to speed on the technology, the sooner the better. “At the moment, crypto is growing quick,” Mr. Ammori said. “There are some rivalries, and there may be moments of disagreement, but generally everyone is rowing in the same direction.”

What do you think? Will crypto ever be mainstream? Let us know: [email protected].