Government Shutdown Looms: Will Crypto Regulation Take a Backseat?

The threat of a US government shutdown is hanging in the air, and while the duration remains uncertain, even a brief closure could have ripple effects, potentially pushing digital asset regulation down the priority list in Washington. Lawmakers are at odds, with the House of Representatives rejecting a Senate-backed bill to keep the government funded. Speaker Kevin McCarthy’s proposals are struggling to gain traction, especially from the more conservative wing of the House. All signs point towards a possible government shutdown, at least partially, starting October 1st.

What Happens During a Government Shutdown?

A US government shutdown kicks in when Congress fails to approve funding for the upcoming fiscal year. Think of it as hitting the pause button on many government operations. Essential services will continue, but non-essential activities across federal agencies and departments will be put on hold.

Even if this shutdown is short-lived – remember the one in February 2018 that lasted less than a day? – the legislative agenda can get reshuffled. Crypto-related bills, despite their growing importance, might find themselves lower down the pecking order when lawmakers get back to business as usual.

Crypto Bills on Hold?

During a shutdown, any legislative progress on digital assets comes to a standstill. Whether it’s a bill that could boost the crypto industry or one that aims to tighten regulations, everything gets put in limbo. Key regulatory bodies like the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) would operate with a minimal workforce.

Remember the 2019 shutdown? Cointelegraph reported that the SEC’s ability to enforce regulations and oversee the crypto space was significantly hampered. A repeat scenario could mean further delays and uncertainty for the crypto industry.

Congressional Priorities Post-Shutdown: Will Crypto Make the Cut?

Sheila Warren, CEO of the Crypto Council for Innovation, highlights the uncertainty. “After a shutdown, it’s unclear what issues will become top priorities for Congress,” she noted. “Beyond government funding, Congress is already facing a tight schedule with statutory deadlines looming before the year ends.”

This raises a critical question: Will crypto regulation remain a priority once the government reopens?

Back in July, the House Financial Services Committee made headway by advancing several crypto-focused bills. These include:

• The Financial Innovation and Technology for the 21st Century Act (FIT): Aiming for regulatory clarity for digital assets.
• The Blockchain Regulatory Certainty Act: Seeking to exempt certain blockchain intermediaries from specific regulations.
• The Clarity for Payment Stablecoins Act: Focusing on establishing a regulatory framework for stablecoins.
• The Keep Your Coins Act: Addressing concerns around government control over digital wallets.

However, a government shutdown could leave these bills languishing, with no amendments or floor votes in sight.

Election Year Distractions and Shifting Focus

Warren suggests that a shutdown could easily divert Congress’s attention away from crypto. A multitude of other pressing issues could take center stage. Adding to the complexity, the 2024 elections are just around the corner, which are likely to further fragment lawmakers’ focus.

Treasury Secretary Janet Yellen has openly criticized “House Republicans” for their inaction. In a speech on September 29th, she called a shutdown “perilous and unwarranted,” warning of potential negative economic consequences. This political tension only adds to the uncertainty surrounding the legislative agenda.

Democrats’ Stance and Bipartisan Support

Even before the shutdown threat intensified, a September 27th hearing of the House Financial Services Committee saw Democratic members voicing strong criticism of Republicans. While the hearing was officially about SEC oversight, Representative Don Beyer from Virginia stood out as a Democrat who voiced support for crypto legislation, even amidst the government funding concerns.

Despite this bipartisan element, it seems unlikely that lawmakers will tackle crypto legislation before October begins.

The Clock is Ticking for Crypto Legislation

Ron Hammond, director of government relations at the Blockchain Association, emphasizes the challenge. “The impending shutdown highlights the significant hurdles in advancing crucial legislation in a divided Congress,” he stated.

He further explains, “For crypto legislation, the length of the shutdown directly impacts the window of opportunity for Congress to debate proposals on stablecoins and market structure.”

However, Hammond offers a glimmer of hope. “The positive side is that the various crypto bills in the House have strong bipartisan backing and are likely to see action, potentially in November.” This suggests that while a shutdown may cause delays, it might not completely derail the momentum for crypto regulation.

Market Reaction: Bitcoin and Ether Diverge

Interestingly, at the time of writing, Bitcoin’s price had dipped below $27,000. However, this price movement didn’t seem directly linked to the government shutdown news or the SEC’s ongoing deliberations on spot Bitcoin ETFs.

On the other hand, Ether’s price had jumped above $1,600 in the past few days. This surge coincided with announcements from various firms about launching ETFs tied to Ether futures in the first week of October. This divergence in market reactions highlights the complex and multifaceted nature of the crypto market, where various factors can influence price movements.

Looking Ahead: Navigating Uncertainty

The potential US government shutdown adds another layer of complexity to the already intricate landscape of crypto regulation. While the delay might be temporary, it introduces uncertainty and could potentially shift legislative priorities. The crypto industry will need to closely monitor developments in Washington and continue to engage with lawmakers to ensure that digital asset legislation remains on the agenda. The bipartisan support for crypto bills offers a silver lining, suggesting that progress is still possible once the political climate stabilizes. For now, the industry waits, watches, and prepares to navigate the potential fallout of a government shutdown and its impact on the future of crypto regulation in the United States.