Cryptocurrency advocates have long complained that U.S. regulations governing their industry are either unclear, illogical or nonexistent. By launching a political action committee — formed in January but just unveiled publicly — they seek to change that.
"HODLpac is a new tool in the crypto policymaking toolbox," Kristin Smith, one of the PAC's board members, told Protocol. "We have the Blockchain Association, standards groups and the Crypto Rating Council, but there hasn't really been an organized grassroots and political giving organization."
The PAC will support crypto-friendly congressional candidates with the goal of getting legislation passed to create a welcoming regulatory environment for cryptocurrencies and those who use them, at a time when efforts in the field continue to face obstacles, said Smith and Tyler Whirty, the board members who spearheaded its creation.
Smith is executive director of the Blockchain Association, a trade association for U.S. crypto businesses; Whirty, who previously did crypto-related research for the Cato Institute, works for a D.C.-based venture capital firm. HODLpac isn't the first organization to advocate for crypto in the Capitol, but some hope its creation might herald a new era in government relations.
"These are all steps toward maturation," said James Cooper, a blockchain expert at California Western School of Law in San Diego. "We're moving away from a libertarian, cypherpunk, anarchistic ethos and towards legitimacy in a nondisruptive sense."
The PAC's name is an inside joke: In crypto-speak, "hodl" means to hold onto your bitcoin, a reference to an old forum post in which an inebriated user misspelled "hold" as "hodl."
Cryptocurrency burst onto the mainstream D.C. radar last year, when Mark Zuckerberg and David Marcus testified to Congress about Facebook's plan to make a digital currency called Libra backed by government currencies and managed by a Swiss nonprofit association that included companies such as Visa and Uber. They were met with bipartisan disdain, and after several consortium members dropped out, Libra's future is uncertain.
Crypto experts disagree on whether Libra, if and when it launches, will be a cryptocurrency at all. Many say a true cryptocurrency runs on a public network accessible to anyone and scoff at what they expect to be just another currency under centralized control. Still, some say the negative reaction to Libra unfairly colored perceptions of crypto more generally.
"Unfortunately, the rest of the crypto world gets caught up in the conversation concerning Facebook and their quasi-monopoly," Cooper said. "It's all conflated into Russian trolls and foreign interference in our elections, and it all gets labeled incorrectly. The crypto industry writ large has an image problem, and [the PAC] should help remedy that if done correctly."
Especially frustrating to those pushing for innovation in the industry are accusations that crypto breeds illicit activity, with criminals using it to carry out extortion and buy drugs and other goods in darknet markets. Treasury Secretary Steven Mnuchin has called cryptocurrency a "national security issue," and in February he told the Senate Finance Committee to expect "a lot of work coming out very quickly" from regulators.
Darknet markets saw $790 million worth of cryptocurrency sales in 2019, up 70% from the year before, Chainalysis reported. That was less than 1% of all incoming cryptocurrency transactions.
An embedded irony
Smith and Whirty spent February gathering support and donations from leading lights of the crypto industry, and raised $21,000 from nine donors (including Smith). Initial donors include Cameron and Tyler Winklevoss, co-founders of the Gemini crypto exchange, and Brian Armstrong, the CEO of Coinbase.
The PAC carries a fundamental contradiction and challenge: It's advocating in D.C. for a community whose members are generally skeptical of institutions with centralized authority — like the federal government.
"There's a vocal minority [of bitcoin enthusiasts] that think either you shouldn't engage with government or there's no point engaging with government because it will be made obsolete by technology," said Jerry Brito, the co-founder of Coin Center, a D.C.-based nonprofit. "What I would say to them is: You may not be interested in government, but the government is interested in you."
Many crypto enthusiasts, even the more ideologically moderate, see cryptocurrencies as part of a larger movement toward a decentralized internet, where ordinary people aren't at the mercy of governments and data-hoarding tech companies.
With that ethos in mind, Smith and Whirty are making the PAC itself an experiment in decentralized governance, with "quadratic voting" to decide where the money goes. The model allows people to express not only their preferences, but how strongly they feel about them. In practice, the PAC organizers say, it will level the playing field between large and small donors.
HODLpac won't accept donations in cryptocurrency at first, but expects to add that capability soon, Whirty said.
The plan to back supportive candidates comes as neither party in Congress has staked out a clear position on crypto legislation. Support for sensible rules, at least so far, has been encouragingly bipartisan, the HODLpac organizers said. "There are no natural enemies to crypto policy," Smith said. "The challenge is that it's complicated, and there's a large barrier to understanding how this works."
When Brito stumbled across bitcoin in 2011, he had recently started a tech policy program at George Mason University. Like many early adopters, he was captivated by the elegance of the bitcoin network's design — but he was also uniquely consumed by the regulatory and legal implications.
He wrote a bitcoin primer for policymakers in 2012. After the FBI's high-profile takedown of the dark-web marketplace Silk Road the following year prompted an explosion of government interest, he testified in the first congressional cryptocurrency hearings. "I was sort of the 'guy in D.C.' when the government began to pay attention," he said.
At the time, bitcoin was niche, its devotees tending to stay in the shadows. As a decentralized network, it had no formal leaders, and the only pro-crypto nonprofit in existence at the time, the Bitcoin Foundation, was facing its own regulatory troubles. Brito and three acquaintances — including Balaji Srinivasan, who would become CTO of Coinbase — figured bitcoin needed an advocate in D.C., so in 2014 they launched Coin Center, envisioning it as a kind of Electronic Frontier Foundation for Bitcoin.
The 2017 wave of interest in crypto — and the rise of unregulated "Initial Coin Offerings," many of which turned out to be scams — fueled a bubble that burst. Yet the crypto ecosystem continued to flower, attracting developers, financial professionals and entrepreneurs (and yes, scammers) from all over the world.
Today, thousands of cryptocurrencies are in circulation. And crypto projects abound, from CryptoKitties, a game once so popular that it clogged the Ethereum network it's built on, to Filecoin, a decentralized storage network whose hotly anticipated launch is expected this year.
Taxes and Telegram
It was the influx of money that spurred crypto to change its approach to government outreach, Brito said. Suddenly, many more people had a stake in the industry and the regulations that govern it, and several organizations, including the Blockchain Association, sprung up to work the halls of D.C.
A central regulatory challenge is taxes. Reporting crypto-related income on tax returns has always been complicated, and even casual dilettantes have gotten swept up in the IRS' attempts to ensure compliance.
"Lots of hobbyists have started receiving notices from the IRS in the past two years — people with small amounts like hundreds of dollars," said Chandan Lodha, the COO of CoinTracker, which makes crypto tax software. Many in the industry say that rather than clarifying things, the agency's October 2019 guidance only muddied the waters further.
Currently, any purchase with cryptocurrency, even buying a coffee, is technically considered a taxable event involving a capital gain, with the consumer required to document the change in value from the time they acquired the currency to the time they spent it. Legislation to make small transactions tax-exempt was first introduced in Congress several years ago, and reintroduced in January as the Virtual Currency Tax Fairness Act.
Regulators and legislators have generally become more crypto-savvy in recent years, Brito said. "At the very beginning, you would go into an office and you'd have to explain it from scratch to someone, and they would have no idea what you were talking about," he said. "Today, I think you go into an office, and they have a better sense of what you're talking about."
The crypto community has found a champion in Hester Peirce, a member of the SEC who recently proposed a "safe harbor" rule to make it easier for crypto startups to comply with securities laws.
Nonetheless, many in the U.S. crypto industry say legitimate projects have gotten caught up in the SEC's regulatory snares along with the scams and complain that the agency has stifled innovation by "legislating through enforcement" rather than providing clear guidance on how securities laws apply to crypto offerings.
This month, Rep. Paul Gosar of Arizona introduced the Cryptocurrency Act of 2020, sweeping legislation that would clarify when cryptocurrency tokens count as securities and which agencies regulate them. A more narrow proposal to clarify tokens' security status, the Token Taxonomy Act, was previously introduced for the second time in April 2019 by Ohio Rep. Warren Davidson. With Congress preoccupied with the coronavirus pandemic, neither is expected to pass anytime soon.
Meanwhile, on March 24, the SEC won a preliminary injunction against Telegram, the crypto community's encrypted messaging app of choice, barring the company from distributing its cryptocurrency, called Grams, to investors who two years ago bought $1.7 billion worth of tokens entitling them to units of the currency. (Telegram has appealed the injunction.)
The SEC argued that Telegram was selling unregistered securities, with Stephanie Avakian, co-director of the SEC's Division of Enforcement, saying the agency sought to keep Telegram from "flooding the U.S. markets with digital tokens" while failing to provide investors "information regarding Grams and Telegram's business operations, financial condition, risk factors and management that the securities laws require."
Would-be crypto innovators see the Telegram-SEC saga as a warning, and say it could set precedents that will cement the U.S.' reputation as an unfriendly jurisdiction for crypto entrepreneurs. Smith said she knew of at least one company that postponed its own token offering while monitoring the Telegram battle.
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Cryptocurrency prices have plummeted along with traditional stock markets amid the coronavirus pandemic. Still, some in the crypto community sense an opportunity to introduce mainstream society to the decentralized projects they've been working on — and even get some laws passed in the process.
"There are probably more important things going on in the world right now than giving money to political candidates," Smith said. "At the same time, there's going to be packages of legislation in late summer and fall that are going to have to do with the recovery and getting people re-employed, and we think there's a good opportunity for legislation related to crypto to be a part of that."
Correction: Chandan Lodha is the COO of CoinTracker. Updated March 31, 2020.
