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Andreessen Horowitz’s Plan to Dominate Crypto

WASHINGTON — There was lunch at a French bistro close to Congress with Senator Kirsten Gillibrand of New York, and a gathering with a few of President Biden’s high financial aides. Then got here a personal dinner with a serious monetary regulator.

The subject was at all times the identical: “how you can win the longer term” within the world race for cryptocurrency dominance — at the least from the angle of Andreessen Horowitz, the Silicon Valley enterprise capital agency that dispatched a workforce of Washington insiders to make its case throughout a latest five-day lobbying blitz.

At a second when know-how firms have a nasty odor in Washington and because the fast-evolving crypto {industry} is drawing growing scrutiny from lawmakers and regulators, Andreessen Horowitz is pursuing a very audacious plan: to each personal massive chunks of the rising world of digital currencies and have a hand in writing the foundations for the way it will function.

To push its agenda, the agency has employed an array of skilled authorities fingers. They embody Tomicah Tillemann, a former aide to Mr. Biden when he was a senator; Katie Haun, a onetime Justice Division cryptocurrency prosecutor; and Brian D. Quintenz, who joined the hassle simply days after leaving the Commodity Futures Buying and selling Fee, a crypto regulator.

Already, Andreessen Horowitz — additionally identified by the nickname A16Z — has funded at the least 50 crypto start-ups, with a number of new offers introduced weekly, making it the biggest crypto investor globally.

This summer season it arrange a brand new $2.2 billion funding fund to revenue off the fast development of cryptocurrency and the technological and monetary structure behind it.

It’s also a serious investor in Coinbase, one of many largest cryptocurrency exchanges, together with quite a lot of newer start-ups. The agency has introduced on so many individuals with {industry} experience that the hiring spree has develop into a working joke on Twitter.

The imaginative and prescient that A16Z’s founders, Marc Andreessen and Ben Horowitz, are pursuing is to be on the middle of a booming new ecosystem of digital know-how that may disrupt industries as different as artwork, banking, finance, gaming, e-commerce, music, social media and telecommunications.

Their regulatory proposal highlights points with basic bipartisan help: overcoming China’s head begin in digital foreign money and funds, reclaiming America’s position because the main know-how innovator and increasing financial alternative.

“To the extent policymakers can get entry to good info, that’s going to assist them clear up their issues and in addition allow the subsequent technology of the web to flourish in a manner that’s going to be good for us,” Mr. Tillemann mentioned. “That’s mutually useful.”

However the proposals, outdoors specialists who’ve examined them say, are way more about self-interest than societal or nationwide advantages.

“This can be a fairly nakedly clear try to learn their backside line,” mentioned Lee Reiners, a former supervisor of systemically essential monetary establishments on the Federal Reserve Financial institution of New York.

Draft laws A16Z is circulating would give the businesses it has invested in a leg up by exempting associated entities from sure tax reporting, client safety and anti-money-laundering necessities.

“This can be a basic case of asking the fox to design the henhouse,” mentioned Rohan Gray, a finance lawyer and legislation college professor who has suggested congressional Democrats on laws to control digital funds that’s pending within the Home. “They are saying issues in a manner that sounds cheap, nevertheless it includes them primarily giving up little or no within the public curiosity.”

Rachael Horwitz, a spokeswoman for A16Z, mentioned the corporate welcomed this debate. “We’re making massive bets on founders and concepts with the potential to form the longer term within the hope that they’ll topple the gatekeepers and middlemen of the previous,” she mentioned.

From its inception in 2009, Andreessen Horowitz has trumpeted a unique strategy to enterprise capital.

It promoted the cult of the founder — the concept that the hard-driving entrepreneurs who begin an organization are finest positioned to steer — and as a substitute of simply supplying capital it supplied assist with recruiting, gross sales and advertising.

It was a philosophy rooted in private expertise. At 22, as a latest graduate in laptop science from the College of Illinois at Urbana-Champaign, Mr. Andreessen helped create Netscape, the primary common internet browser, in 1994. Mr. Horowitz joined Netscape firstly of a warfare with Microsoft, which dominated the private computing market and intentionally restricted entry to the browser. Netscape was bought to AOL for $4.2 billion in 1998, and a 12 months later, the pair began an early cloud-computing firm that was bought to Hewlett-Packard for $1.6 billion in 2007.

As enterprise capitalists, Mr. Andreessen and Mr. Horowitz aggressively raised cash and outbid rivals, taking early stakes in Fb, Twitter, Pinterest, Airbnb and Slack. Mr. Andreessen outlined the strategy as “us versus the world.”

Andreessen Horowitz fashions itself on the Hollywood expertise administration agency Artistic Artists Company, which embraced the outsize ambition of representing each Hollywood star.

“The purpose was principally monopoly,” certainly one of C.A.A.’s founders, Michael Ovitz, mentioned in an April dialogue on the A16Z-backed audio app Clubhouse with Mr. Andreessen and Mr. Horowitz, who introduced him on to clarify his company’s affect on them.

Andreessen Horowitz’s first cryptocurrency funding was in late 2013 with a $20 million preliminary guess on Coinbase. Quickly after, Mr. Andreessen wrote in an opinion article in The New York Instances that Bitcoin, the world’s first cryptocurrency, heralded a seismic technological shift, on par with the PC within the Seventies and the web within the Nineties.

“Bitcoin presents a sweeping vista of alternative to reimagine how the monetary system can and will work within the web period,” Mr. Andreessen wrote.

Coinbase went public in April, with Andreessen Horowitz’s stake valued at $11 billion.

In 2018, the agency began its first fund devoted to crypto investments, elevating $350 million. It was a separate authorized entity to adjust to securities guidelines that restrict enterprise capital companies’ allocations to riskier investments, like cryptocurrency companies.

However seeing crypto’s rising potential, Andreessen Horowitz reworked from a enterprise capital agency right into a registered funding adviser in 2019 — a expensive transfer that subjected it to better regulatory oversight however allowed it to pursue crypto offers unfettered.

The agency created a second $515 million crypto fund in 2020 and a 3rd $2.2 billion fund this 12 months.

Delivering important returns on all this funding, executives at A16Z rapidly realized, would necessitate taking part in a serious position in shaping guidelines for these firms.

The solar was setting because the sound of army helicopters often drowned out the chatter at an A16Z cocktail get together alongside the Washington waterfront. The gathering featured a lot of the agency’s lately employed coverage workforce, milling about on a patio as they nibbled on crab truffles and sipped drinks, wrapping up their five-day lobbying push.

No different crypto participant within the Washington affect recreation has a lineup that rivals the workforce A16Z has assembled.

Ms. Haun, who began the Washington lobbying effort, serves as co-director of the $2 billion cryptocurrency fund. Whereas on the Justice Division, she helped prosecute two undercover federal brokers who stole tons of of hundreds of {dollars}’ price of Bitcoin from Silk Street, a bootleg dark-web market they have been investigating.

She joined A16Z in 2018 and this summer season introduced in Mr. Tillemann, who’s now the workforce’s chief advocate in Washington.

Different new members embody William H. Hinman, the previous director of the company finance division on the Securities and Alternate Fee; Brent McIntosh, a former Treasury beneath secretary in the course of the Trump administration; and Jai Ramaswamy, who ran the Justice Division’s cash laundering division in the course of the Obama administration. Every of them, together with Mr. Quintenz, who was an outspoken booster of crypto whereas on the C.F.T.C., participated in briefings with monetary regulators, members of Congress or White Home officers.

However none of them are registered as lobbyists. Mr. Tillemann argued that isn’t what they have been doing in Washington. “We don’t assume we want a lobbying workforce proper now, and we don’t view this as a lobbying effort,” he mentioned, calling it “a chance to work constructively with policymakers to unravel issues of mutual concern.”

The agency claims its representatives don’t must register as lobbyists due to a loophole limiting the registration requirement to those that spend at the least 20 % of their time lobbying.

Throughout their pitches in Washington, the A16Z workforce members incessantly talked about their dedication to “democratizing” the web. They mentioned the decentralized nature of cryptocurrency would make it simpler for extra folks to achieve entry to loans and investments by way of crypto platforms resembling Compound and Uniswap that Andreessen has backed.

They usually mentioned cryptocurrency would allow artists, musicians and influencers to earn cash free from costly middlemen, by A16Z-backed platforms like Open Sea, which permits them to promote their work utilizing nonfungible tokens, or NFTs, which show possession of a selected piece of artwork or music discovered on-line.

However Mr. Reiners and Mr. Gray, legal professionals who’ve intently learn A16Z’s regulatory proposals, and Dan Awrey, a Cornell Legislation College professor and monetary regulation professional who has suggested world monetary establishments, mentioned they have been troubled by many key parts of the plan. They mentioned it was self-interested and would create pathways to evade current laws, leaving shoppers susceptible.

They pointed to a provision A16Z included in draft laws that would create an exemption from the Funding Firm Act of 1940, which topics firms to oversight by the S.E.C.

Sure crypto start-ups that A16Z is funding are being organized round a brand new kind of entity referred to as a decentralized autonomous group, or DAO, which might be exempt from the act beneath A16Z’s plan.

This exemption is warranted, A16Z argues, as a result of DAOs are supposedly run by the group of crypto customers moderately than for-profit executives. However the monetary backers of those platforms nonetheless stand to make appreciable earnings as a result of the founders of the crypto start-ups usually personal a large share of the particular crypto tokens that may, in some circumstances, grant voting energy to assist govern these platforms.

The A16Z proposal would additionally restrict the power of the Client Monetary Safety Bureau to control DAOs past requiring sure disclosures. It as a substitute proposes that the federal authorities take into account counting on an industry-created “self-regulatory group” to outline and implement how shoppers are handled. And it will give preferential tax therapy to DAOs, limiting info they’ve to show over to the Inside Income Service and making so-called member dues that they gather tax exempt.

The online impact of A16Z’s proposals, specialists mentioned, could be to open loopholes that the agency and different monetary {industry} gamers, maybe even hedge funds, may use to reorganize themselves in a manner that would undermine the monetary regulatory system.

“Within the identify of democratizing finance, what I’m seeing is a recreation of three-card monte the place they’re transferring balls round hoping folks don’t perceive the sport is rigged,” Mr. Awrey mentioned. “However what they’re calling for right here is the wholesale exemption from a few of the most essential investor safety legal guidelines in the USA.”

In a 10-page response the corporate supplied to The Instances, one A16Z lawyer wrote that “we welcome clarifying suggestions on how you can tighten this as much as keep away from making a broader exemption than was meant.”

The White Home and lawmakers declined to debate their conferences with the agency’s representatives intimately, however firms within the {industry} mentioned Andreessen Horowitz’s efforts in Washington have been a part of what made it a beautiful funding accomplice.

“The legislation is the legislation, nevertheless it’s only a query of how it’s utilized,” mentioned Ian Lee, one of many founders of Syndicate, a crypto start-up that selected A16Z to steer its funding spherical in June. “It’s an enormous purpose why partnering with Andreessen Horowitz and its authorized and regulatory workforce made a number of sense.”



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