Rising Middle East Tensions Further Reduce Chances of Crypto Legislation Passing This Year

National security issues typically take precedence over other legislation, according to experts.

The chances of Congress passing stablecoin legislation or the Senate approving crypto asset regulatory framework FIT21 this session are slim, given the lack of majorities needed and the many competing priorities for Congress’ attention. But this week’s suddenly rising tensions in the Middle East are reducing those already small odds by the hour.

“Large national security developments tend to derail planned legislation,” said Ron Hammond, Director of Government Relations at the Blockchain Association.

In the past two days, Israel and Lebanese militant group Hezbollah have begun fighting on the ground in southern Lebanon, a notable escalation of the conflict between two groups that have thus far been hesitant to cross the Israeli-Lebanese border. On Tuesday, Iran also fired 180 missiles at Israel, several of which breached Israel’s “iron dome” missile defense system and made landfall in central and southern parts of the country. These two developments mark a rapid expansion in a conflict which, until recently, was primarily being fought between Israel and Palestinian armed group Hamas.

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On Tuesday, the news that Iran was deploying missiles against Israel sent the price of bitcoin, which is perceived by some to be a riskier asset, down 2%. But the more significant impact of the rise in conflict in the Middle East may be on the prospects for potential crypto legislation being passed in the US, as the latest developments draw Congress’ focus away from topics that aren’t matters of life and death.

Though the House passed FIT21, a bill that would place most digital assets under the regulatory authority of the CFTC, earlier this year, it has failed to advance through the Senate, where the Senate Banking Committee Chairman Sherrod Brown (D-OH), Senator Elizabeth Warren (D -MA) and others oppose the bill’s lack of anti-money laundering (AML) provisions.

Stablecoin legislation, meanwhile, has found more bipartisan support, with Rep. Maxine Waters, the top Democrat on the House Financial Services Committee, urging the parties to find a compromise before the end of the year in an SEC Congressional hearing last week. “I strongly believe we can reach a deal that prioritizes strong protections for our nation’s consumers and strong federal oversight,” Waters said.

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However, Jaret Seiberg, an analyst with TD Cowen’s Washington Research Group, wrote in a note Monday that he was “pessimistic” about either bill being passed, although stablecoin legislation was somewhat more likely.

Even without an escalating war involving one of the United States’ key allies, however, Congress’ attention is divided. Issues such as inflation and border security are higher on the agenda than cryptocurrency legislation, according to experts, who add that crypto’s best shot at getting legislation passed involves tying it to other high-priority bills, like the SAFER banking bill, which would give the marijuana industry expanded access to financial services.

A stablecoin bill “would definitely need to be tied to another piece of legislation,” said H. Joshua Rivera, general counsel at venture capital firm Blockchain Capital. “But conflict in the Middle East certainly doesn’t help the prospects.”

Hammond agreed. “Congress still has many items to tackle by year’s end and as things currently stand, stablecoin legislation is in the mix of potential items,” he said. “While it is too early to determine the implications of the Middle East developments on (a) lame duck (session), there is precedent (that) these larger matters take nearly all focus.”