Capitol Account interview with Jake Chervinsky and Dave Grimaldi

Capitol Account interviewed Blockchain Association's Jake Chervinsky and Dave Grimaldi last week to discuss the new Congress, regulators, and moving past FTX. The full interview is below. Please sign up for Capitol Account's newsletter at www.capitolaccountdc.com.

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Friday Q and A: It’s only January, but the Washington policy apparatus is already taking aim at the crypto industry on numerous fronts. The SEC is firing off enforcement cases.?In?the now Republican-led House, there’s a new digital assets subcommittee with members eager to legislate.?In?the Democratic Senate, Banking Committee Chairman?Sherrod Brown?is readying hearings and considering his own bill. And, of course, the bad news keeps coming post-FTX. Just yesterday, Genesis Global Holdco filed for bankruptcy – the fourth big token lender to fail since last year.

To help us wrap our minds around all the activity, we sat down (on Google Meet) with two battle-hardened veterans from the Blockchain Association:?Jake Chervinsky?and?Dave Grimaldi. While it’s not a perfect analogy, think of them as the brains and the brawn for the trade group and its 100-plus member companies. As chief policy officer, Chervinsky gets deep into the details of the crypto world and its technology. Grimaldi, executive vice president of government relations, is more the political muscle?– he’s the association’s point person on?Capitol?Hill.

Chervinsky joined BA from Compound Labs, a developer of a DeFi protocol; before that he was an attorney?in?private practice. Grimaldi has been a senior counsel for Rep.?Jim Clyburn?and chief of staff to an FCC commissioner. His private sector work includes opening a D.C. office for Pandora. As crypto evangelists, the two aren’t hanging their heads or trying to explain away?Sam Bankman-Fried’s fraud. And even with the obvious headwinds, they’re energized for 2023. Read on to hear their thoughts on Congress, the regulatory agencies and why it's very wrong to think of tokens simply as speculative investment products. Here’s our (lightly edited and condensed) conversation:

Capitol?Account: Despite all the bad headlines, you guys seem excited for this year.?

Dave Grimaldi: This is the mother of all advocacy endeavors. It's exhilarating, and it's full of adrenaline. I do think our companies are changing the world – and we are part of crafting the future of global finance.

CA: What’s the difference between policy and government relations?

Jake Chervinsky: Policy is the?in-the-weeds substantive work of trying to figure out the nuances of this technology and the businesses that our member companies are trying to build –?and then how do we translate those nuances into tailored legislation and regulatory action. Government relations is taking that message and bringing it to the policy makers?in?Washington. Figuring out what their concerns are, and how we can address what's most important to them.?

CA: How do you work together?

DG: Jake and his policy team know this stuff up and down, side to side –?in?terms of how the different components of the players?in?our industry fit together…We have members of Congress who are asking us constantly: is this a good idea for a draft bill? How would this work? How would this affect your companies? Is this a bad idea? Is this a productive idea? Our policy team assesses all of it…When you're dealing with a nascent industry that is gaining trust with elected officials, it's a tricky navigation.

CA: We might as well ask the FTX question...

DG: Believe me, we're not happy about it. I don't know how much drywall is remaining?in?Jake's house, that hasn't been broken or smashed. I don't know how many bottles are half full?in?all of our liquor cabinets. But the people who were most upset about FTX – you're looking at them.

CA:?The massive alleged fraud has no doubt made your jobs harder.?

DG: Pre FTX, we were still narrative building and evangelizing on the benefits to everyday Americans getting into the digital asset economy – why it has benefits that run across demographics, to the unbanked, the underbanked, investors, everyday citizens, etc. We were talking about how the pieces fit together…And there were other market events last year that preceded FTX…[that were] playing primarily to Democrats’ skepticism and curiosity. There was Tornado Cash, there was Terra Luna.

CA: FTX was a lot more attention grabbing.

DG: Members [of Congress] were rightly upset. They were rightly angry, and they were rightly curious as to how it happened and why…We were on a giant, kind of, call-center response…[We said,] this was one man, this was one criminal. This is not indicative of this industry by any stretch. Don't jump to that conclusion. Let's let the justice system do its work…You now have members of Congress who, as?Jim Himes, Democrat from Connecticut, put it very succinctly, and I think fairly… `Are we going to trust first and then ask questions later? Or are we going to not trust first and ask questions, and maybe trust a little bit after we fact gather?’ When you have something like this, on the scale of FTX, it's a shockwave.

JC: We want law enforcement to do its job. And the way that crypto works actually helps them to do their job. That was one of the amazing things that happened with FTX – everyone tracking all of these transactions?in?real time?in?a way that you would never be able to do?in?the traditional financial system.

CA: But this obviously changes Washington’s perceptions of the crypto universe.

JC: The immediate reaction, as always with a crisis like this?in?any industry, is: What law or regulation would stop this from happening. And there aren't really good answers to that question, especially while we're still trying to investigate and understand how this happened…We see bills coming from Senator [Elizabeth]?Warren, for example, that are essentially just a ban on all of crypto. We’ve had to redouble our efforts to explain there's a balance to strike here. The industry doesn't think there should be zero regulation. The industry thinks there should be tailored regulation that addresses the risks, while still maximizing the benefits.

CA: Does the FTX scandal make that argument about tailoring – which some equate to lighter-touch oversight – a lot more difficult?

JC:?I don't think it makes it harder for us to argue for what we think is good policy. If anything, it focused policy makers on trying to understand – many of them for the first time – what's really going on here. That creates an opportunity for us to educate them, and explain why the same policy prescriptions we were already advocating for are the right ones to address issues like this. But certainly, as Dave said, there's some skepticism now and that creates some tough work for us.

CA: What are your thoughts about Republicans taking over the House??Patrick McHenry?now leads Financial Services and he created a subcommittee to focus on crypto. Is it going to be focused on passing new legislation?

DG:?You could see the stablecoin draft that [Rep.?Maxine]?Waters?and McHenry put together…being pulled off the shelf. What does that look like? Is there really buy-in?from the chairman? TBD. McHenry, himself though, is very much a chairman –?in?every way. I think that he is going to have an imprint on everything his subcommittees do. He is a pretty bought-in, and a very knowledgeable member of Congress, on our issues. He's going to be active.

CA: And of course, the Senate is run by Democrats. Does that make it harder for any bill to become law?

DG:?It's difficult to see the politics lining up.?

JC: I think the presumption is it will be difficult for anything to get through this divided Congress. [But] there are some things that everyone seems to agree on when it comes to crypto regulation. Stablecoin legislation is the one thing that shouldn't be so complex that it can't get done?in?a bipartisan way. So I think if there's anything that we can get done, it'll be that.

CA: Your biggest challenge seems to be with crypto-skeptic Democrats.

DG: There are Senate Democrats who do not want to talk about us, or have congressional hearings about our industry because they think it legitimizes us. Is there a more sad and abysmal way of looking at a hugely growing area of the American economy than to ignore it because you don't like it? And therefore you're going to urge your congressional colleagues not to talk about it? That's amateur hour. Luckily, I think we're seeing that dissipate a little bit. But that was a strongly held view.

CA: How about the SEC? That’s not exactly friendly territory either.

JC: I think we will see more regulation by enforcement. Which, of course, we don't support and we don't think is how regulation ought to be done – where there is no decision by Congress about how these very new and very unique markets and companies should be regulated…That has been the SEC’s practice for many years and I don't see why they would change now. It's disappointing, but an unfortunate reality.

CA: SEC Chair?Gary Gensler?says that exchanges and most tokens are covered by the securities laws – and they should just come?in?an register with the agency. Is it that simple?

JC: This is a major question for Congress to decide – not to delegate to an agency through legislation that was done?in?the 1930s and 40s…If the SEC is going to try to make those decisions itself, it has to do that through rulemaking. It cannot do that through enforcement.

CA: Should Congress also dictate crypto’s primary regulator?

JC: Yes. That has been one of the biggest debates for quite a long time. And the consensus, at least before the FTX collapse, was that the CFTC was the preferable regulator for spot digital asset markets, rather than the SEC…We've seen no proposed legislation at any point?in?time that identifies the SEC as the sole primary regulator for crypto markets. I think at this moment, the industry is doing some really hard thinking?in?the wake of FTX about whether the CFTC really is the right regulator.

CA: A lot of people see crypto as just a speculative investment.

DG: Our 2023 is pushing back on that absurd contention. Right now, there are 56 Congressional Black Caucus members?in?the House of Representatives. There are 42 Congressional Hispanic Caucus members. So that's almost 100 of the 435. We are full of stats and anecdotes and stories about the power of crypto, the adoption?in?minority communities, about what they're doing, how they're starting new businesses, how they're enriching their ecosystems….[Also] the creative piece is absolutely blowing up. Members of Congress are now really starting to understand NFTs and figure out what that value exchange looks like, and how their constituents are using them.

JC: I certainly agree with that. I can give you my answer when I hear this – and it's sad that it's 2023, and we still hear this. What is most important here is: what the internet did for information, crypto does for value.?In?other words, it allows anyone, anywhere, with an internet connection to store and transfer value without having to rely on a trusted third party. And where this matters the most is?in?places where people do not have that access. So I think about?in?Ukraine, when Russia invades and people are cut off from the banks and they're fleeing their homes – and the way that they are able to carry value out is?in?crypto. And we saw that.

CA: What are your policy goals for the year?

DG: It's storytelling. It's speaking truth to power. It is moving past the pieces of 2022 that we certainly didn't want to have happen. We are moving on as an industry – better safeguards, rooting out bad actors, working with Congress to understand us.

CA: Some of your competitors?in?finance, namely banks and payment companies, will be pushing a different narrative.

JC:?As the saying goes: first they ignore us, then they laugh at us, then they fight us. That's where we are now. And that's ok...If you look at the rise of literally every world changing technology, going back centuries, this is exactly how it happens. Whether it's cars replacing horses and buggies, or light bulbs replacing gas. This is just what happens. And we're ready to take that on.