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The Revolving Door Is Good for Bitcoin

·12 min read

Brian Brooks went from a law firm to a bank to a mortgage company to a crypto exchange to America’s top banking regulatory agency to a crypto exchange again. He’s on the market again – but which way will it be, public sector or private?

The lanky Colorado native with his shock of sandy-brown hair is quite familiar with the revolving door, and may even epitomize the best and the worst of the well-trodden corridor between private interests and public service. A dizzying number of former regulators – attracted by eye-popping valuations – are returning to private life at crypto firms while, to a lesser extent, business leaders are heading to public office. This trend is not unique to crypto and raises questions about whose interests these public offices truly serve: their own or the people’s.

This article is an addition to CoinDesk’s Policy Week.

“If you’re looking for regulation that facilitates commerce and promotes growth, then you want somebody who understands the details of the industry and knows what frameworks are required to get customers comfortable and create safety,” Brooks said in a phone call, dialing in from an airport in the bustling crypto hub of Miami.

His career in brief: After graduating from the University of Chicago Law School in 1994, Brooks was hired by the national law firm O’Melveny & Myers in Washington, D.C., where he worked for 17 years. In 2011, he joined the legal team at OneWest Bank led by future Treasury Secretary Steven Mnuchin, a bank once called a “foreclosure machine.”

Mnuchin was one of Brooks’ clients at O’Melveny & Myers, as was Fannie Mae, the privately owned but U.S. government-supported mortgage giant placed into conservatorship as a result of the 2008 financial crisis; Brooks joined in 2014. He turned down a position to lead the Consumer Financial Protection Bureau in 2017, and the following year a passion for crypto led him to take a position as Coinbase’s top lawyer and an advisory role at decentralized credit network Spring Labs. In 2020, Brooks was tapped by Donald Trump to serve as acting comptroller of the currency during the final months of the administration under Mnuchin.

At the Office of the Comptroller of the Currency (OCC), informed by his previous time in the public sector, he says, Brooks moved quickly. In just 10 months, he issued a series of interpretative letters allowing banks to custody crypto, hold stablecoin reserves and serve as nodes on public blockchain networks as well as issuing national banking charters to crypto firms Anchorage, Paxos and Protego. It was perhaps the most significant regulatory advance for the industry since the U.S. Commodity Futures Trading Commission (CFTC) classified bitcoin as a commodity in 2014.

“What I’ve always tried to do in all of my jobs is to make an impact. I think in our market economy there are people in all kinds of sectors who make a big impact. There are people who are public servants working in the government. There are people who are making an impact running big companies,” Brooks told Bloomberg Law in 2015.

Brooks was something of a forerunner when it comes to the increasing connection between crypto startups and public institutions. Though there are legitimate concerns about potential conflicts of interest when regulators and business people can easily swap places, this cross-pollination may also lead to good policy. Certain roadblocks remain in place, legacies from a similar portal between Wall Street and Washington, but crypto presents its own set of issues.

Playing catch-up

“As crypto becomes more mainstream, as crypto seeks more institutional acceptance, as crypto seeks legitimacy in [Washington,] D.C., more crypto firms will be looking to get people involved in government into their firms,” Timi Iwayemi, a research assistant who works on the crypto beat at the Revolving Door Project at Center for Economic and Policy Research, a progressive think tank, said. Although Iwayemi’s project doesn’t keep hard data, he noted that crypto seems to be playing “catch-up” in its attempt to influence policy by hiring from public officials.

In recent months, at least three former U.S. commodities regulators have announced signing contracts with private cryptocurrency firms. All signaled their support of the emerging industry while still in office at the CFTC. This includes digital dollar advocates Chris Giancarlo, aka “Crypto Dad” for his pro-crypto touch; Daniel Gorfine, who led the in-agency digital currency lab; and stablecoin-defender Brian Quintenz. Mark Wetjen, who led the CFTC for five years beginning in 2011, joined crypto exchange MIAX to expand operations into futures and derivatives products.

They are by no means alone. Jay Clayton, the former U.S. Securities and Exchange Commission chairman who once said the majority of cryptocurrencies looked like pot-shot securities, joined the advisory board of the crypto custody provider Fireblocks. He’s also a paid adviser to the hedge fund One River Digital Asset Management, which has exposure to bitcoin and ether. “I’ve always loved the potential efficiencies of this technology,” Clayton told the Financial Times when joining Fireblocks.

“Industry knowledge isn’t siloed,” Iwayemi said.

Binance, which has been filling its ranks with regulatory-whispers, hired former Treasury Department investigator Greg Monahan and Max Baucus, former chairman of the Senate Finance Committee. Blockchain.com courted the former adviser to President Barack Obama, Jim Messina, to its board. Andreessen Horowitz (a16z), a venture capitalist firm with an increasingly ambitious crypto book, is in a category of its own. The firm, which announced a multibillion-dollar crypto fund and initiative to educate pols on Web 3, recently brought on former fellow prosecutor Katie Haun, former director of the SEC’s Division of Corporation Finance Bill Hinman and Brent McIntosh, the former Treasury Department official who specialized in the regulation of digital assets.

“Crypto companies recruiting former regulators is a signal that the industry understands that the mainstreaming of crypto will be a very bumpy road if we don’t level up our expertise around compliance and risk as well as proactively engage, educate and advocate more productively with policy makers,” Chief Policy Officer Teana Baker-Taylor at the Chamber of Digital Commerce, a crypto lobbying group, said.

By and large, positions created for former overseers are sinecures – ambiguously defined “advisory” roles that offer legitimacy but maybe not business smarts. Often companies are paying for a type of branding, other times for a Rolodex. The connections people created while in government can help business insiders get meetings – say, at the U.S. Treasury or SEC – that can help establish some firms above their competitors, Iwayemi said.

Paying for power and influence might be anti-competitive, but perhaps, at this stage of the game, any favorable policy decisions will lift all boats. “Of course [the revolving door] becomes less desirable once the business interests ‘capture’ the regulators; but I gather there is not yet much danger of that,” right-libertarian leaning economist George Selgin said in an email. Coinbase, the leading U.S. crypto exchange, seems not to have translated into any lasting favors with regulators, despite its calls for increased regulation.

This game of musical chairs between regulators and business folk is just one prong of an industry trying to establish legitimacy and dominance. As CoinDesk reported last week, the crypto industry has also seen a measurable uptick in the amount of dollars spent lobbying regulators, enforcers and politicians. The money can be spent on bespoke lobbying groups within firms, on outside agitators like the Blockchain Association and Coin Center or even in the form of campaign donations. Despite many firms doubling or tripling their influence-spend, or starting up a program, CoinDesk found little evidence the money is having an effect.

Read more: Crypto Learns to Play the DC Influence Game

Fewer people have followed Brooks’ model by heading into public office with experience in crypto. Chainalysis former chief technical counsel Michael Mosier joined the Financial Crimes Enforcement Network (FinCEN) as acting director last spring.

Brooks has had a hand in shaping some of those policies, but his legacy is in doubt. Last month, the New York Times did a special report detailing how the nation’s largest accounting firms have paid dividends sending their own employees to work at places like the Treasury or Internal Revenue Service (IRS). “The accounting industry’s back-and-forth arrangements get results. The taxes that corporations pay, as a percentage of GDP, have been shrinking for years,” the Time’s Andrew Ross Sorkin wrote.

If only Brooks could be so lucky. According to some industry experts, there’s some chance that current OCC or Treasury officials could rewrite Brooks’s pro-crypto rules. There are signs that firms like Circle and Figure, which are applying for bank charters, may face a harder time getting approved. Brooks, for his part, feels secure in his legacy. “You’re going to find that it’s really hard to rescind bank charters,” he said. Further, his stablecoin guidance “was super-tightly lawyered.”

Another issue with the revolving door in crypto is that sometimes it doesn’t seem to stop spinning. As noted, Brooks took an abrupt departure from Binance.US, citing “strategic differences” with Binance CEO Changpeng Zhao. But so did Giancarlo, who left BlockFi just as intense regulatory scrutiny of the firm’s lending product kicked up, four months after starting. Brett Redfearn, the ex-SEC official, also left Coinbase after just four months. These quick departures highlight the precarious nature of diving headfirst into crypto.

“That may be a case where they feel like this is something they do not want to actually legitimize,” Iwayemi said. But there’s a litany of potential reasons why it may be so difficult for crypto firms to retain their regulatory talent – ranging from cultural misfits to regulatory uncertainty, he added. “In a way it’s kind of a blight on the industry … it [raises] the question of what is going wrong,” Iwayemi said.

More from Policy Week

DeFi Is Like Nothing Regulators Have Seen Before. How Should They Tackle It?

Bennett Tomlin: What Stablecoins Might Become

Gensler for a Day: How Rohan Grey Would Regulate Stablecoins

Alex Adelman & Aubrey Strobel: Kill the BitLicense

Opinion: How to Do Business as a DAO

None of the major problems with revolving doors are unique to crypto. Governments rely on industry expertise from the private sector when forming policy. But the easy exchange between top executives in the financial sector and watchdog agencies has had its effect. It’s the exception to the rule that cabinet-level positions, or ranking enforcers, will have ties to industry at some point in the past or will leave their perch for “greener” pastures. That’s such the case that The Wall Street Journal cheered former FDIC Chairman Sheila Bair (now in crypto) for heading straight to the Pew Charitable Trusts, a public policy charity.

This is despite the fact that there are long-standing rules meant to prevent the worst forms of pay-for-play influence. The Federal Reserve has checks on bank supervisions going straight into private practice (the rules were strengthened in 2016, after public pushback). SEC enforcers are “barred for life” from dealing with specific parties they managed while at the commission. Senior officials and commissioners are barred from lobbying the SEC for at least one year after leaving. But rules only have so much effect. One of President Obama’s first executive orders was to place limits around lobbyists that worked for the administration – only to see 20% “deregistering” to skirt the rules.

Play book

Iwayemi says that stricter rules will be necessary across the financial sector, and might need to have specific crypto provisions. But there’s also a positive agenda that can be enforced: governments, instead of turning to the private sector, should look for future regulators and legislators among those with a strong history of public works. They can come from academia, non-profits, even journalism – “industry knowledge isn’t siloed,” he said.

It should also be noted that ex-industry men can prove hardliners in office. The prime example is Gary Gensler, a Goldman Sachs alum who wrote tough derivatives rules while at the CFTC. He’s continued that track at the SEC, where the former MIT professor who taught blockchain courses is gearing up to take tough action against the crypto industry. Further, the informed opinions of SEC Commissioner Hester Pierce show that you need not have a stake in the industry to want to see it succeed.

The revolving door is much derided in popular culture – perhaps as the most emblematic fault of a corrupt system that favors elites. But at the same time, perhaps at a societal level, we just don’t care. When you google “revolving door” site:nytimes.com you are as likely to come across an article on the circular modes of egress than the popular term for the portal between public and private life. Rules can be enforced, people can be shamed, but it’s also a matter for individual regulators to wrestle with. Do I self-deal or not?

It is both unlikely and unfair to cut large swaths of the population out of ever serving the public – it would be operating from the point of view that capitalists can never be trusted. But America has always been a country that aims for the highest liberal ideals – placing innocence before doubt and the possibility of redemption. If interested parties want to serve the public, should they not be given the benefit of the doubt?

So how then might we set policy that inspires them to serve the good of the nation, rather than their own ends? How can we create more Genslers who choose the written law over the law of the markets? I asked Iwayemi.

“That is a difficult philosophical question. A simple answer is: Better pay would definitely lead to stronger government capacity and longer retention of staff. When people are compensated they are happy to stay in sustained public service.” Either way, it comes down to personal enrichment.

CORRECTION (OCT. 27, 2021 20:30 UTC): Brian Brooks rejected a position at the Consumer Financial Protection Bureau. He was not turned down for the job as previously stated. We regret the error.