Crypto’s state-federal ‘flippening’- POLITICO | #socialmedia | #hacking | #aihp

With help from Derek Robertson

In crypto circles, the term “the flippening” refers to a hypothetical event in which a smaller blockchain network surpasses the Bitcoin network in size.

Right now, the crypto world is experiencing another sort of flippening: in the dynamic between state and federal regulation of blockchain activity. Lately, the prospect has arisen that crypto’s backers will have to start worrying more about the states than the feds.

So far, states like Wyoming and Texas, and some cities, have been the ones passing laws encouraging cryptocurrency activity. Federal lawmakers have moved more slowly, while federal agencies have expended considerable effort enforcing existing financial rules on the free-wheeling industry.

That dynamic hasn’t exactly gone away, but in recent days, lawmakers in Washington have advanced an accommodating framework for regulating crypto. At the same time, policymakers in New York have advanced more exacting rules on two fronts.

This week Sens. Cynthia Lummis, R-Wyo., and Kirsten Gillibrand, D-N.Y., introduced their much anticipated cryptocurrency legislation, which, as expected, limits the businesses and users that can be taxed on their crypto.

Some executives are also expressing fresh optimism about the Biden administration’s posture. Yesterday, the head of ETFs at Grayscale, a cryptocurrency investment firm that has mounted an aggressive campaign to pressure the Securities and Exchange Commission into approving a spot Bitcoin ETF, said it was only a matter of time before the agency does so. “It’s not that long ago that there really was a question of if this was going to happen,” said the executive, David LaValle, at an industry gathering in Austin. “And now it’s clearly a question of when it’s going to happen.”

Meanwhile, it’s New York State that has emerged of late as a source of more exacting crypto regulation. Last week, the state legislature passed a two-year moratorium on cryptocurrency mining powered by fossil fuel plants, which Gov. Kathy Hochul, a Democrat, is now considering signing into law.

On Wednesday, New York’s Department of Financial Services codified its standards with strict new guidance for dollar-backed stablecoin issuers that would require full backing and regular audits. In many of its particulars, the guidance goes beyond the stablecoin provisions in the Lummis-Gillibrand bill, which defers in places to state-level rules.

(Though the guidance follows the collapse of the algorithmic stablecoin TerraLuna, whose designers tried and failed to maintain a dollar peg through the use of financial engineering, New York has specified that it only applies to dollar-backed stablecoins.)

Some issuers welcomed the added clarity, saying it would shore up public trust in stablecoins. Eric Soufer, who leads crypto at the public affairs firm Tusk Strategies, said his client, the stablecoin issuer Paxos, was “happy” with the new rules.

But Soufer, who has worked as an adviser to former state attorney general Eric Schneiderman and other officials in New York, said the industry remains wary that a spate of state-level rulemaking could get complicated quickly.

“People are worried about a patchwork across 50 states,” he said. “Most of the regulated entities are looking for the feds to assert themselves.”

What do the developments mean outside of New York’s borders?

The mining moratorium could serve as a model for those in other states. As for the stablecoin rules, even if other states don’t emulate them, they could still dictate the way the industry works around the country, the way automakers have had to adapt to California’s strict fuel efficiency standards.

State standards can hold far-reaching sway in the digital realm, too.

Alexander Grieve, a crypto lobbyist at Tiger Hill Partners, cited the influence of the California Consumer Privacy Act, a 2018 law that goes beyond federal data privacy protections, in thinking through the implications of New York’s rules.

“Given New York’s importance as a financial nexus, and the number of crypto and traditional firms there that will need to use stablecoins,” he said, “it may become a similar de-facto national standard in the absence of codified federal standards.”

Blockchain technology was invented to circumvent government control and to bypass political borders drawn on maps. That was the vision, anyways. For now, its proponents will have to contend with the messy realities of American federalism.

This week in POLITICO Magazine, I wrote about a certain rocket-building zillionaire who happens to overlap with our interests here at DFD — an excerpt is below, and you can read the full essay here. — Derek Robertson

In a somewhat awkwardly worded tweet, Musk recently described Democrats as “the kindness party” that has now become “the party of division & hate.” Whatever he meant by that, there’s one thing the Democratic Party clearly has become: The party of the mods. As social media platforms like Twitter and Facebook have become the de facto public square over the past decade, liberals have been outspoken about the necessity for those platforms to remove extremist and misleading content.

Of which there is, of course, plenty, and equally plenty of evidence that conservatives are more likely to concoct and share it — hence the liberal appetite for moderation. (In fairness, liberals haven’t exactly covered themselves in glory in policing this information landscape, most notably in pushing for the censorship of legitimate stories about the incriminating content of Hunter Biden’s laptop.)

The key to understanding Musk’s “free speech” crusade is to understand that for a large number of Americans, the actual substance or direction of that censorship is mostly irrelevant. And to Silicon Valley-native quasi-libertarians like Musk, moderation is a break-in-case-of-glass emergency tactic if it’s to be used at all.

In this view, the internet is an oasis of humanity in its vast, uncontrollable wooliness, allowed unlimited freedom of expression contra the institutions that govern our real lives. That was once a techno-utopian, vaguely liberal-coded idea; now it’s one that squarely appeals to, and largely benefits, due to the effects of social media algorithms, the right.

You might have seen some strange images floating around social media recently. Like eerily accurate courtroom-style sketches of the titular “Alien” from the film of the same name. Or a Soviet-style propaganda poster of British food celebrity Nigella Lawson. Or trail-cam footage of a dinosaur.

None of these are particularly lifelike, and some attempts to generate human faces are quite frightening. But these images, created by the AI-powered “DALL-E Mini” image generator, are just close enough to lifelike to pique our collective imagination.DALL-E Mini is an open-source clone of OpenAI’s DALL-E, the use of which that organization (despite its name) keeps tightly restricted for the time being for fear of its potential misuse by bad actors — Mira Murati, OpenAI’s head of research, explicitly told the New York Times that the technology is “not a product.”

But the large data sets like the ones OpenAI’s DALL-E uses are widely available, as is the computing power necessary to make highly specific images from them. (DALL-E Mini’s servers are frequently overloaded due to its popularity, but refresh the page a few times and you’ll get there.) AI researchers and regulators might fear the potential impact of such powerful technology on society, but stunts or gimmicks like the Mini prove how tough it is to keep a lid on it. — Derek Robertson

• Tether, a popular stablecoin, is losing ground to various rivals among investors.
• General Motors’ autonomous vehicle taxi service has been approved to drive on specific streets in San Francisco.
• Meta is cutting costs in its Reality Labs division, including pushing back its plans to launch AR glasses.
• Meet the cadre of billionaires pushing the government to invest in U.S.-based chip manufacturing.
• Jack Dorsey is throwing his hat into the ring with a planned decentralized web platform.

Stay in touch with the whole team: Ben Schreckinger ([email protected]); Derek Robertson ([email protected]); Konstantin Kakaes ([email protected]);  and Heidi Vogt ([email protected]). Follow us on Twitter @DigitalFuture.

Ben Schreckinger covers tech, finance and politics for POLITICO; he is an investor in cryptocurrency.

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A clarification on the lead item in yesterday’s newsletter: Three companies will be carrying Amazon’s low-earth-orbiting satellites into space. Blue Origin is one of them; the other two are Arianespace and ULA.