Lifting the Regulatory Blindfold on Crypto

Sigal Mandelker joined Ribbit Capital in April 2020, an investment firm focused on financial services and technology. Previously, she served as Acting Deputy Secretary of the U.S. Treasury Department and Under Secretary for Terrorism and Financial Intelligence, overseeing key components like OFAC, FinCEN, the Office of Terrorist Financing and Financial Crimes, and the Office of Intelligence and Analysis. Before serving at Treasury, Sigal was a partner at Proskauer in New York and served in a number of senior positions in the U.S. government, including as Deputy Assistant Attorney General in the Criminal Division of the Justice Department, an AUSA in the U.S. Attorney’s Office for the Southern District of New York, Counselor to Secretary of Homeland Security Michael Chertoff, Counsel to the Deputy Attorney General, and as a law clerk on the U.S. Supreme Court. Sigal sits on various boards and is a frequent speaker on financial technology.

Imagine it’s 1990, and Congress passes a law saying that no one involved in policy-making related to the internet can have an email address. Absurd, right? How could policymakers regulate something they don’t understand? Or think back to 1886, when Carl Benz developed the first gasoline-powered automobile (the “horseless coach”); what if lawmakers passed a rule forbidding anyone who owns a car from influencing car safety regulations? Ridiculous. Now, let’s go even further back—to 1787, when the framers of the U.S. Constitution gave Congress the authority to “coin money” and regulate its value. Imagine if they’d also said, “But if you own any of those coins, you cannot regulate money.” An utterly nonsensical restriction.

And yet…

In 2022, the U.S. Office of Government Ethics (OGE) issued a legal opinion that effectively prohibited federal employees from holding even the smallest amount of crypto or stablecoins if they’re involved in regulating or participating in any matter related to those assets. This has effectively become a blanket ban—without any exceptions or de minimis exemptions—on government employees holding and therefore being able to interact with and understand crypto. Practically, it bans regulators and other government officials with responsibilities in this space from fully comprehending and making smart decisions about a rapidly evolving industry that is poised to transform the global financial landscape.

The question is: why does this matter? In a world increasingly defined by digital innovation, having regulators who are prohibited from holding or even experimenting with new technologies is a dangerous, regressive stance. These restrictions are not only absurd and impractical; they risk leaving the U.S. far behind in the global race for digital asset leadership.

The Disconnect Between Regulation and Innovation

Let’s look at the specifics of OGE’s ruling through the hypothetical scenario they provide: An employee is asked to work on a regulation requiring stablecoins to be fully backed by U.S. dollars. If that employee owns $100 worth of a stablecoin that is not backed by dollars, they are prohibited from working on the regulation, even though the amount in question is minimal.

The logic behind this prohibition is rooted in traditional concerns about conflicts of interest. If a regulator holds an asset, such as stock in a company they’re regulating, there’s a valid concern that they may act in ways that benefit their financial interests. But the government has traditionally understood that people often own stock (and/or mutual or index funds holding a lot of underlying stocks) and therefore it has tried to strike a reasonable balance between conflict avoidance and functional policymaking—by allowing a de minimis exception for anyone hodling less than $15,000 worth of stock in a company.  

However, OGE has concluded that this reasonable approach can’t work with crypto and stablecoins, where OGE believes even $1 of ownership immutably conflicts you out of any policymaking, supervisory, or enforcement role as a “fanatic” who will only reach decisions on the basis of that single dollar.^[1] This is not only flawed and absurd thinking; it’s dangerous.  

The Need for Hands-On Experience

Digital assets represent far more than just speculative financial instruments; they are the building blocks of a new kind of digital economy. For anyone to regulate digital assets effectively, they need more than just a theoretical understanding. They need to engage with the technology directly. Otherwise, it’s like someone trying to learn baseball just by reading a book. They won’t get much out of it until they grab a mitt and a ball, and get out on the field. 

OGE’s prohibition is effectively preventing government employees from fully understanding the mechanisms, benefits, and risks of the technology. Absent direct interaction, regulators and others in the government cannot fully grasp how crypto and blockchain works, how smart contracts operate, what security looks like in this sector, what the use cases are, and how crypto can be used in innovative ways to solve real-world problems such as identity, the efficiency of cross-border transactions, privacy and much more. 

Just reading white papers and attending industry demonstrations (which is what regulators are relegated to doing) can’t get them there. Just like baseball, there’s no substitute for first-hand experience. We have seen the consequences of OGE’s approach in the past few years; policymakers have struggled to keep pace with rapid developments in digital assets. Now, courts are repeatedly stepping in to correct them.

A Restriction Without a Parallel

While most post people I have discussed this topic with (including many civil servants) share my concern regarding the existing rules, some argue that the OGE’s directive makes sense. After all, regulators shouldn’t be allowed to influence policy that affects their own financial interests, right? 

But here’s the problem: this restriction is applied inconsistently. It’s not applied across all industries. For instance, would the Federal Reserve prohibit its governors and staff from holding or using U.S. dollars–because their decisions on monetary policy impact the value of the dollar? Would the CFTC, SEC, FTC, EPA, BLM, and IRS not allow their employees to own jewelry because they all regulate gold?

According to the logic behind the OGE’s ruling, that would be the necessary conclusion. But it’s an absurd one.

The Exodus of Talent

One of the most concerning outcomes of the OGE’s directive is the chilling impact it has had on the federal government’s ability to recruit and retain talent. The crypto industry is one of the most dynamic, fast-moving sectors in the global economy. We need experts in the government who not only understand the technology but have worked with it directly. 

Consider the story of Jennifer (name changed for anonymity purposes), a phenomenal former government employee with extensive crypto expertise who I worked closely with when I was the Under Secretary for Terrorism and Financial Intelligence at the U.S. Treasury Department. Jennifer was a longtime dedicated public servant, working for years in law enforcement and then in the Office of Foreign Assets Control (OFAC)--where she was involved in pioneering the use of sanctions for crypto wallet addresses.  

At a certain point, Jennifer left the government to work at a blockchain analytics firm. A consummate public servant, she later returned to government–where she could bring her even more extensive knowledge of crypto. However, she made a professionally fatal mistake in between: she got married. And her husband (who worked at another agency) happened to own just over $16k in six different tokens. 

While she had disclosed this when she rejoined, at some point she was told that his holdings prohibited her from working on crypto-related matters. Importantly, this wasn’t $16k in one token; it was six different tokens. If these were securities, under the de minimis exception, the threshold would have been much higher. Ultimately, he chose to divest all of his holdings to satisfy government ethics. Unfortunately, even though he was able to divest a portion of his tokens, bringing their value to under $15k, he ended up with a logistical problem. $10k of his tokens got caught up in a bankruptcy proceeding and so he couldn’t actually divest the entire amount. Despite this, ethics officials wouldn’t relent; Jennifer felt like her longtime public service was being tainted. Sadly, she left her government job. The biggest loser was the federal government–which lost a talented and dedicated professional with a deep understanding of the technology.

By contrast, when I was Under Secretary, I was fortunate to have a terrific and very knowledgeable team with deep experience in crypto, many having worked on it long before crypto was cool. In 2019, we issued the FinCEN guidance on “convertible virtual currencies” (crypto), a 30-page document that analyzed various business models to help founders and developers understand when their projects are considered money transmitters–and therefore have Bank Secrecy Act obligations–and when they are not. Alongside this guidance, we released a 12-page advisory on typologies and red flags to help prevent crypto from being used for illicit activities.

As Under Secretary, I believed in providing as much guidance as possible to the private sector across all of our programs. The private sector wasn’t the enemy—it drove the U.S. economy. To disrupt illicit activity, we needed to clearly communicate the rules, and help businesses comply. As I reviewed the 42 pages with the team, I found virtually no question our team couldn't answer. While we still had much to learn–and there were still things I worried about–we weren't going to let uncertainty about all the ways the technology would evolve delay providing clarity for innovators.

The Global Race for Digital Asset Innovation

While the U.S. government continues to push talented individuals away, and restricts its regulators from engaging with new technologies, other countries are embracing the potential of digital assets. Consider Singapore, for example, whose government has taken a proactive approach by fostering collaboration between regulators and the financial industry. Initiatives like Project Guardian, which aims to enhance financial market efficiency through asset tokenization, have attracted major U.S. global financial institutions who otherwise struggle to engage with the technology in the US because of a harsh regulatory environment.

Meanwhile, the U.S. has become a regulatory black hole. As U.S. regulators remain entrenched in outdated policies and restrictive regulations, innovators have been leaving the country in search of these more favorable environments abroad. 

The Consequences of "No" Over "Yes"

The reluctance to engage with digital assets has already caused significant negative consequences for the U.S. In the past few years, we’ve seen: 

A Path Forward

I am very optimistic that this will change in the coming years, with an incoming Trump Administration that has been very clear about its embrace of innovation. 

At the top of the list should be rescinding OGE’s restrictive guidance, and allowing regulators to engage with the technology through testnets and other infrastructure. There should be no blanket ban on government employees owning crypto. The ethical rules should be on par with those applicable to other assets like stocks. And frankly for stablecoins that are akin to a digital dollar, there should be no restrictions. 

In addition, regulatory agencies must prioritize hiring talent with technical expertise in this area. Special hiring authorities should be used to attract professionals who can contribute meaningfully to the rule-making and supervision process. 

Finally, regulators should be given tools to interact with crypto and stablecoins in a real-world setting. This includes building testnet infrastructures where government employees can experiment with the technology, understand smart contracts, custody, privacy, test – and approve – new regulatory tools, and gain hands-on experience. Regulators should be required to interact with the technology before engaging in rulemaking or making decisions that could materially impact the sector.

It’s time to remove the regulatory blindfold and allow the U.S. to lead the way in the future of finance.

The opinions shared in this article are the author’s own and do not reflect the views of any organization they are affiliated with.

^[1] It is possible, I suppose, that OGE is actually expressing an official government position of crypto maximalism and believes that every dollar in cryptocurrency will be worth billions next year, necessitating this complete ban. Somehow, though, I doubt it.

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