Crypto’s aggressive bid for more DC firepower

It was an impressive hiring coup for crypto: When Grayscale signed former U.S. Solicitor General Don Verrilli, it enlisted a D.C. legal rock star, known for being one of Obamacare’s prominent defenders.

The move underlines crypto’s aggressive bid to recruit former government officials and staffers, including high-profile figures like Verrilli, at a time when the industry faces growing legal and policy challenges.

Government officials and staff leaving to take private-sector roles — called the “revolving door” — is common in major industries such as energy and finance. But the trend has become even more pronounced in crypto, said Jeff Hauser, director of the Revolving Door Project.

“I've never seen an industry go from no revolvers on payroll to this quantity of revolvers as quickly as crypto,” he told Protocol. “Crypto has invested in hiring swamp creatures more rapidly than any other industry in history.”

The Tech Transparency Project identified more than 200 former government officials who occupied “key positions in the White House, Congress, federal regulatory agencies, and national political campaigns” and have moved on to roles in the crypto industry.

The report, which came out in March, said many of the moves involved former officials from government agencies that “directly regulate” the financial services industry and companies involved in crypto, including at least 31 former Treasury Department officials, 28 from the SEC, 15 from the CFTC, five from the Comptroller of the Currency and three from the CFPB.

Most of the hires took place in the last two years, the report said. They include government veterans who are now leading policy, legal and compliance teams at crypto companies, investors and advisory firms:

• Brian Brooks, former acting head of the Office of Comptroller of the Currency, is now CEO of Bitfury. He also served briefly as CEO of Binance.US.
• Jay Clayton, former SEC chair, is now a member of the advisory boards of One River Digital Asset Management and digital asset custody company Fireblocks.
• Thaya Knight, who worked as legal counsel at the SEC, including for commissioner Hester Peirce, is now a senior public policy manager at Coinbase.
• Faryar Shirzad, who was a deputy national security adviser under President George W. Bush before joining Goldman Sachs, is now chief policy officer at Coinbase.
• Dan Gallagher, a former SEC commissioner, is now chief legal officer at Robinhood, the online brokerage that has aggressively expanded to crypto.
• Chris Giancarlo, former chairman of the CFTC, is now an advisory board member of the Chamber of Digital Commerce.
• Kirstjen Nielsen, former DHS secretary, recently joined Astra Protocol, a Web3 compliance startup, as a strategic adviser.
• Kathryn Haun, who served as an assistant U.S. attorney and digital currency coordinator at the Justice Department, is now a Coinbase board member and founded her own crypto-focused investment firm.

Katherine Dowling, who once served as an assistant U.S. attorney before eventually becoming general counsel and chief compliance officer at Bitwise, told Protocol that the moves are “a natural evolution” to a “compelling, new and interesting space” where “you get to be a big thinker.”

And big thinkers are needed by an industry facing mounting legal difficulties. The fear that crypto could lead to serious financial instability is growing in the wake of the stunning crash of the UST stablecoin and the overall crypto market slump.

Crypto companies are beefing up their legal and compliance teams as the industry wages many regulatory and legal battles. Crypto won a victory last week when Sens. Cynthia Lummis and Kirsten Gillibrand introduced a bipartisan bill that endorses many key industry positions.

But the industry is also dealing with other proposals aimed at imposing more restrictions, as well as wrestling with more aggressive scrutiny and enforcement actions from key regulators like the SEC.

Crypto companies and supporters have been criticized for aggressive and even brash public statements, including personal attacks, against leading regulators, including SEC Chair Gary Gensler.

Many crypto executives and representatives “have built no longstanding ties and they don't speak the language,” Hauser said. “They don't know the right levers to push and pull. They don't know the right language to use. They don't know the correct customs.”

That’s where the Washington, D.C. veterans come in.

Kristin Smith, executive director of the Blockchain Association, the largest crypto lobbying organization, spent years as a legislative staff member in both the House and the Senate.

The Blockchain Association has a wide range of members with “a range of experiences,” Smith said, including companies with limited experience dealing with governments.

Navigating that world can be challenging for crypto and blockchain technologists who set out to build a financial ecosystem that essentially rejects the role of a central authority. But that’s changing, Smith said.

“The sort of libertarian origins of bitcoin are a little bit different than the core of the crypto industry today,” she told Protocol. While “this whole concept of decentralization is new,” many crypto companies understand that “there's going to be interaction with government, there's going to be regulation, there are rules that apply.”

Shirzad, Coinbase’s chief policy officer, said having former regulators and officials in the crypto industry is a “healthy” development. “There's a lot about crypto that is hard to get your mind around,” he told Protocol.

For crypto industry leaders, Shirzad added, “having a bunch of people whose job it is to understand the law, understand the technology and the business and help with navigating what the right policy outcome and legal outcome is good for everybody.”

Kenneth Goodwin agrees. Goodwin, who is now director of Regulatory and Institutional Affairs at Blockchain Intelligence Group, a blockchain analytics company, spent nearly a decade at the Federal Reserve Bank of New York. Crypto companies can rely on team members “who understand the regulatory process … and what it takes to create policies and procedures,” he told Protocol.

Former government officials also bring with them “relationships” which are “very important,” but Goodwin also cited the potential for conflicts of interest.

“I would imagine that's probably a problem: You have collusion,” Goodwin said. “You may have collusion with the SEC. I think people are starting to look at that.”

The ongoing legal battle between the SEC and Ripple highlights those issues. The case has focused on a 2018 speech by former SEC director William Hinman in which he said ether is not a security. His comments sparked a rally in ether’s price, and appeared to endorse the crypto industry’s position.

Nonprofit whistleblower group Empower Oversight published SEC emails that suggested that Hinman, who left the SEC in December 2020, was working for a law firm that was part of the Enterprise Ethereum Alliance, which is dedicated to promoting the commercial use of Ethereum.

The SEC-Ripple brawl has turned into a bitter public dispute. When Clayton, who stepped down as SEC chair shortly after the regulator sued Ripple and who has become a leading crypto adviser, published a Wall Street Journal op-ed endorsing the importance of blockchain technology, Ripple CEO Brad Garlinghouse reacted with a tweet: “Siri, play ‘Ironic’ by Alanis Morissette.”

Grayscale’s Verrilli hire also raised eyebrows. CEO Michael Sonnenshein said Verrilli “brings a unique perspective that other members of our team have not had the same experience with professionally.”

The Revolving Door Project’s Hauser agreed, citing Verrilli’s “very positive personal reputation as a nice guy” who “played a central role in the Obama years as solicitor general, and continued to be a prominent legal voice defending the Affordable Care Act.”

“There are few figures more widely liked in the Democratic legal establishment than Don Verrilli,” Hauser said.

That’s also what makes the Grayscale hire troubling, he argued.

“Having a very prominent, well-liked Democrat arguing these cases or signing on to brief is potentially going to help Grayscale win cases that they would not otherwise win before Democratic judges or moderate Republicans,” he said.