Crypto's IRS Victory Highlights Growing Influence in Congress, Demanding Fewer Compromises

As the industry progresses with legislation on stablecoins and market-structure regulations, the type of compromises lobbyists were once prepared to make may no longer be necessary.

Key Points to Know:

• The crypto industry's fight against an Internal Revenue Service rule serves as a pivotal test for future U.S. legislation, which is a primary goal for the industry.
• Strong support from Democrats in recent votes indicates what the industry can expect when Congress addresses stablecoin and market-structure legislation.

U.S. crypto lobbyists watched with enthusiasm in recent days as a pair of votes confirmed what they had hoped for: Congress is aligning with their interests.

The industry, which faced significant challenges just three years ago, now counts strong allies in the White House and U.S. financial agencies. Recent votes in the Senate and House of Representatives on an IRS rule show that their support among lawmakers is robust. A significant number of Democrats joined the crypto industry's reliable Republican allies, leading advocates to believe that they may not need to make many concessions in future negotiations on more critical legislation.

Just before leaving office, former President Joe Biden's IRS finalized a rule that would treat decentralized finance (DeFi) projects as brokers, requiring them to perform full tax reporting for users. However, both the House and Senate recently voted to overturn this rule under the Congressional Review Act, with large bipartisan support. The votes succeeded by wide margins, bolstered by 19 Senate Democrats and 76 House Democrats who opposed the policy of their party's administration.

With more than a third of Democrats supporting the crypto industry in each chamber, there's little reason to believe they wouldn't also back other crypto-related issues.

"For years, we’ve been playing defense — trying to protect the industry from hostile regulators and relying on compromises that, in many cases, weakened the final legislative product," said Kristin Smith, CEO of the Blockchain Association, which advocates for pro-crypto policy in Washington. "But now we’re able to think a bit more expansively about what’s possible at the federal level."

The digital assets bill closest to completion is the one aimed at regulating U.S. stablecoin issuers. With the House version under review in committee this week and the Senate’s version nearing a potential sign-off by the Senate Banking Committee, both chambers could soon vote on the finalized legislation. In an era of intense partisanship, crypto could be one of the few issues with bipartisan support.

As the details are being worked out, an industry that might have previously been pressured into accepting stringent anti-money-laundering controls to maintain Democratic support can now push forward without making significant compromises, according to industry insiders.

The industry's ultimate goal is the passage of legislation that would establish a clear regulatory framework for U.S. crypto trading and transactions, as well as for businesses and projects dealing with digital assets. If Congress enacts such a bill, it would provide legal clarity for the sector, reducing the need for federal agencies to stretch existing laws and eliminating the reliance on the courts for resolution.

Lawmakers are building on previous efforts, particularly the Financial Innovation and Technology for the 21st Century Act (FIT21), which passed the House in the last session but failed in the Senate. While a replacement for this effort may take longer than the stablecoin legislation, it could have a smoother path through Congress when it eventually gains momentum.

On the same day that lawmakers were preparing for the highly partisan spectacle of President Donald Trump's address to Congress, they also showed significant bipartisan cooperation in the Senate. This "rare and fleeting" moment of unity should enable lawmakers to focus more on the actual policy, according to Kristin Smith.

How did crypto get here?

Following the 2024 elections, Congress saw an influx of new allies for the crypto industry, partly due to the efforts of the Fairshake political action committee, which spent about $139 million to help elect pro-crypto lawmakers from both parties. Perhaps even more crucial to the ongoing legislative discussions is the fact that Fairshake already has $116 million (and growing) in its war chest for next year’s efforts. Lawmakers will know that supporting crypto legislation could lead to campaign donations, while opposing it might prompt spending aimed at challenging their political careers.

The primary backers of Fairshake are Coinbase, a16z, and Ripple Labs, with additional support from Jump Crypto and Uniswap Labs. Coinbase CEO Brian Armstrong expressed his company's continued support for Fairshake, noting that the super PAC "did an incredible job."

"Our supporters in this industry are deeply committed to this political strategy," said Josh Vlasto, a spokesman for Fairshake, in an interview. "We are seeing it in action now and are going to continue to push forward."

Vlasto explained that the recent IRS votes were a direct result of this strategy, which prioritized whether politicians would support crypto bills rather than focusing on their party affiliations or other political views.

"There’s tremendous political benefit in supporting the growth and smart regulation of the industry," Vlasto added.

Before the 2024 elections, FIT21 had already gained substantial support from Democrats in the House, and a separate effort to eliminate a Securities and Exchange Commission crypto accounting policy also saw significant bipartisan backing in both chambers. The industry was already making notable progress.

The 2024 election cycle further revealed a surge in voter familiarity with cryptocurrencies and growing demand for regulation in the space. Advocacy groups like Coinbase-backed Stand With Crypto have worked to mobilize this crypto-interested demographic.

"This is how we got the most pro-crypto Congress we’ve ever seen," Armstrong remarked.