Crypto at Congress: 'Watershed' Moment for Regulation and Web3

Welcome to 16 Minutes, our podcast where we discuss tech trends in the news and their impact on the long arc of innovation. I'm Zoran. Today's topic is crypto regulation and specifically two recent federal government hearings in the news that were focused on crypto and therefore the related trend of Web3. In contrast to the model of Web2 typified by very broadly used but also very centralized platforms run by corporations, Web3 refers to the idea of a new internet enabled by crypto that is owned by builders and users. The first hearing that took place was at the House Committee on Financial Services, featuring 6 crypto company CEOs and resulting in a 5-hour session that prompted headlines like, quote, Congress gets a crash course on cryptocurrency. Then just last week, the U.S. Senate's Banking, Housing and Urban Affairs Committee held its own hearing, this time focused on stablecoins, which are privately issued cryptocurrencies that are pegged to a stable asset such as the U.S. dollar and are used in decentralized financial services. We've covered crypto regulatory issues on 16 Minutes before with A16Z experts, including an episode with former federal prosecutor Katie Han and former New York Stock Exchange regulatory chief Anthony Albanese. That discussion, which you can find in this feed under episode number 50, was about a proposal by the Treasury Department's financial crimes enforcement arm that included provisions for digital asset reporting. As a reminder, none of the following should be taken as investment advice. Please see a16z.com/disclosures for more important information. All of these hearings are also connected to the broader question of innovation. In keeping the US competitive on a global stage. So with that context, our guest today is a16z Global Head of Policy, Tamika Tilghman, who before joining a16z served as senior advisor to two Secretaries of State. He reports on the hearings and their significance and gives a quick pulse check on where we are with crypto regulation right now. He starts with the House hearing.

This was a watershed hearing for a variety of different reasons. You had a number of CEOs from the Web3 ecosystem who are participating in the event. Leaders from some of the largest organizations and companies in the space. And Chair Waters and Patrick McHenry, the, the ranking Republican member, led a hearing that really for the first time in recent memory was a very constructive conversation between members of Congress and representatives of the technology industry. And that was what really set it apart from many of the discussions that have occurred in the past. This was not just gotcha questions, which is what you often encounter in the context of congressional hearings. There was an earnest effort on the part of members in both parties to really try to understand the technology and identify ways in which it could be harnessed. So a very unusual but frankly profoundly exciting hearing that I hope is an indicator of where we're going to see this dialogue headed going forward.

Okay, let's separate the hype from the real, as we do on 16 Minutes. What was actually talked about at the hearing and why was it important?

Well, you had members on both sides asking really thoughtful questions, which is great. Patrick McHenry, the ranking member on the committee, got off to a really good start when he challenged his colleagues. He said, do you know enough about this technology in order to be making policy effectively? And And that, I think, is the question that hopefully all policymakers ask themselves before they start engaging on a new theme. But he stated it very deliberately. Anthony Gonzalez gave a really powerful set of questions specifically referencing Web3 and then tweeted about it afterwards. You saw members like Richie Torres and Gregory Meeks focused on how the technology was going to impact poor and underrepresented communities. Representative Meeks, for example, asked about how it would be possible to custody stablecoin assets, so the assets that are held by organizations that issue stablecoins, in minority-owned financial institutions and community banks. That's a really different conversation than we were having 6 months ago. There were also some good questions on risks, and we are very upfront about the fact that whenever you're deploying new technology, technologies, there are important risks that you need to account for. Thoughtful questions around money laundering and how to address those concerns, thoughtful questions around what these new assets mean for the role of the US dollar in the global economy. But ultimately, overwhelmingly, members were seeking to understand the technology rather than just score points. And, and that's what made the hearing very refreshing.

What do you think accounts for the fact that it was productive, whereas in the past there's been skepticism or mistrust?

Well, let me cite two examples that really struck me. You had multiple members of Congress really latch on to the Web3 narrative. They talked about how we are entering the third generation of the internet. Web3 encompasses the open protocols and dynamism that you saw in Web1, but also has sustainable business models because users own the platform. Platforms that they rely on, and they can have a say in governing the platforms that they rely on. And they also have the potential going forward to share in the upside of those platforms. That is a very different technology paradigm than what we have dealt with in Web2. And as members of Congress came to understand that, there was a real shift in the conversation. The other piece that I think is important for us to keep in mind is that Web3 users are emerging as a very powerful political force. We have seen this in the polling that we have been conducting in recent years. You also see it in the conversations that we're having with members of Congress. They are speaking to their constituents who are finding real benefits from these technologies. Andreessen Horowitz commissioned a survey of voters heading into the midterm elections. And what we are discovering is that once individual voters understand the concept of Web3, 79% of them say they would be more likely to vote for a candidate who supports constructive engagement on Web3. You're also seeing large numbers of voters, particularly from historically underrepresented communities, embrace this technology. And so it's a very different electoral landscape for members of Congress that are having conversations about these issues. And because of that, they're much more focused on how they can get this right.

And then we move into the Senate Banking Committee meeting this week. And some of the sort of pre-coverage of that was, well, it's not going to be so easy in front of the Senate Banking Committee. What actually happened on Tuesday? How is it different or the same as the previous week's meeting? And what did we learn from that?

Well, I think there were two elements of the Senate Banking Committee. It's fair to say that witnesses faced a slightly more skeptical audience. The big distinction in my mind from the hearing that took place in the House and the hearing that took place in the Senate is the hearing in the House recognized that this is much more than a financial technology. This is really about defining the next wave of digital innovation and the next generation of the internet. And once you recognize the scope and scale of what Web3 involves, That pushes the conversation in, frankly, a much more constructive direction than a narrow debate around some of the arcane nuances of US financial regulatory frameworks, many of which date back to the time of the Great Depression. So I think the, the key differentiator between the two hearings is one was focused really on the future of the internet, and the other was much more narrowly focused on stablecoin regulation and applications for stablecoins in a purely financial context. And some of the senators that participated had, I thought, very thoughtful interventions, but you also saw some that were skeptical. And certainly Senator Elizabeth Warren of Massachusetts asked some very tough questions. You had a few other members that I think were primarily interested in, in scoring points as opposed to seeking to determine how they could utilize these tools to advance policy priorities more effectively.

So taken together, these two hearings, what does that tell you about where we are right now in kind of a big picture sense in terms of regulation and crypto?

Well, you now have members that understand, in the words of one of the witnesses at the House hearing, this ecosystem is not yet too big to fail. But it is too big to ignore. And you're going to have to take this technology very seriously going forward, not simply as a financial question, but really as an answer to how we want to design the digital world that we interact with every day. The second piece of this that's really exciting to me is this is a set of issues that remain pre-political. You see members on both sides asking good, thoughtful questions. This was true during the infrastructure bill debate that we had earlier in the year, and it's still true today. This is not a policy matter that breaks down on traditional left-right lines, and that's going to be crucial going forward. We need to maintain a bipartisan coalition if we're going to be able to help the technology realize its full potential. And instead, the cleavages right now are much more a function of which members have had an opportunity to dig in and really understand the technology and which members haven't yet had that chance. And that's why education is so critically important.

So in the bigger picture, progress is being made, but there are these tricky regulatory issues involved like around stablecoins, tokens as securities, reporting requirements, and a host of others. So what are the key issues to watch there?

The countries that are doing this right, the jurisdictions that are creating digital ecosystems and regulatory frameworks that are gold standards for those around the world, are being very deliberate in how they approach this. That has not been the case overwhelmingly among American policymakers to date, and that needs to change. We need policymakers to advance a national strategy for how we're going to develop Web3 technology. This will be bigger than simply redefining the broker-dealer definition that was in the House infrastructure bill. It will be bigger than some of the reporting requirements that we've seen introduced for individuals that really are not well positioned to provide the IRS with information on NFT transactions, which doesn't make any sense for a whole host of reasons. This is really going to be a conversation about what do we want the future of the internet to look like? And we need more members to start taking that issue seriously. If they do, you will see progress on the infrastructure bill and correcting some of the challenges that exist as a result of language that was introduced into that measure. You will see we're going to see, I think, a real effort to push back against some of the overreach that is emerging from specific regulatory agencies, not coincidentally, often agencies with the oldest and most antiquated regulatory frameworks, and recognize that there are elements of this technology that are fundamentally new. As that happens, we're going to end up in a good place, but it's going to be critical for individual voters to make it clear that this is an issue that matters to them.

Thanks so much for being with us today.

My great pleasure.