Feb 6, 2023 - Economy

Washington turns hostile on crypto

Illustration of a bald eagle flying down to grab a golden coin with binary code

Illustration: Sarah Grillo/Axios

A year ago, crypto successfully scraped and scrapped to get a foot in the door in Washington. But in the wake of crypto's winter, and FTX's spectacular collapse, that door has now slammed shut.

Why it matters: Gaining legitimacy in Washington has been an essential part of the industry's push into the mainstream. But a series of recent announcements from the Biden administration suggest there's a crackdown ahead.

Driving the news: The vibes from the White House and federal agencies have been somber at best for anyone trying to run a cryptocurrency business. Over the last two weeks, government officials repeatedly gave crypto the cold shoulder.

  • First, a crypto-friendly bank was firmly denied its request to join the Federal Reserve system. Custodia Bank, which believed it did everything by the book, was blindsided.
  • On a larger scale, the Fed's rejection of Custodia was a major blow for an industry that's always envisioned disrupting traditional finance. To do that, it needs direct access to the systems that underpin it, including the Fed's payment network.

If that didn't make the point clearly enough, the Fed also warned every other bank that they need to ask permission before engaging in any crypto activity —(and it doesn't sound like any will get the nod.

And the White House put out a big-picture statement essentially chasing Congress off the idea of passing any crypto bills this year.

What we're watching: The likely losers in all of this are companies that have played by the rules and operated most closely to paper money.

  • Companies like Coinbase and Gemini live and die by being fiat on-ramps, and they stand to be hurt.
  • The winners, or at least those with the least to lose, are the blockchain natives who live off the books.

The bottom line: Last March, the Biden administration put out a call for its agencies to study the topic of cryptocurrency. Its latest message suggests that it's done studying, and it's come to a conclusion: We don't like it.

  • If a crackdown comes, look for the current crypto price rally to end. Expect a lot of flat to downward trading until the next hot idea counteracts it.
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