Stakes For Crypto in Tuesday’s Elections Are High

As the saying goes, elections have consequences, and tomorrow’s races could have particular impact on the crypto space.

All 435 House seats and one-third of the 100 Senate seats are on the ballot, and most polls show it’s likely the Republicans will certainly take the House and likely will take the Senate. Traditionally for Wall Street this kind of divided government – with the Congress controlled by one party and the White House controlled by the other – is good for business. For most of recent history, the economy has fared better in the six months after midterms. With the correlation between the stock market and crypto lately, convention wisdom says that augers well, but there is a big caveat, according to MarketWatch.  

“If history is any guide, we just gotta get through next Tuesday, and the path forward looks a lot better,” said Timothy Holland, chief investment officer at Orion Advisor Solutions. “Seasonality is about to get better, and you’re gonna get through the midterms. You’re probably also going to get a divided government in DC, and the market likes gridlock,” noted Holland. 

Still, this year could be different, as the stock market performance has already diverged significantly from its historical levels, with the S&P 500 down 27% year-to-date, much worse than the index’s average performance in previous midterm election years. 

“I think given where interest rates are, I wouldn’t be surprised if this is one of those years where the rally fades back,” according to [Mauricio] Di Bartolomeo [chief strategy officer and co-founder at Ledn]. The Federal Reserve on Wednesday raised its key interest rate by 0.75 percentage point to a range of 3.75% to 4%, the highest level in 15 years.

“I believe the markets are gonna be less sensitive to any developments out from the midterms than they are to the Federal Reserve’s movements, to major economic data indicators or to any movements out of the Treasury.” said Joel Kruger, market strategist at LMAX Group.

This election holds specific consequences for the state of crypto regulation, Barron’s says, because the status quo that helps Wall Street could hold up any legislation that provides clarity in crypto regulation.

Executives have spent the last year squabbling with agencies including the Securities and Exchange Commission over how decades-old rules should apply to digital tokens. Officials from exchanges such as Coinbase Global (ticker: COIN) and FTX want new laws to give them guidance on everything from what coins count as securities to what agency they should register with.

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Partisan politics aren’t to blame. Crypto has supporters in both parties, and this year lawmakers have worked on major bills with bipartisan support.

A bill sponsored by the lead Democrat and Republican in the Senate Agriculture Committee would give the Commodity Futures Trading Commission oversight of most crypto trading, an outcome both Coinbase and FTX have lobbied for.

In the House, both leaders of the Financial Services Committee have worked for months to hammer out a compromise on how to regulate so-called stablecoins, whose value is pegged to the dollar.

Even if Republicans take the House or Senate and the chairmanships rotate, both of those bills will likely still be on the table.

“We can see targeted crypto bills move in the next Congress no matter the outcome of the midterms as each of the leading efforts should have bipartisan support,” says Isaac Boltansky, BTIG director of policy research.

The primary roadblock for those bills and others isn’t a matter of partisanship but setting priorities. Over the years, it has become a heavy lift to pass any major laws unless they are attached to must-pass legislation like a spending bill or one to renew expiring programs.

On the plus side of gridlock, if the Senate and House flip, President Joe Biden will have a harder time pushing through his aggressive regulatory regime, which, while still in its nascent stages, has drawn criticism from the crypto community for its overreach.

Further down the road, crypto will become a major issue in the 2024 election and the next president will likely be pro-crypto, Digital Chamber of Commerce CEO Perianne Boring told Andrew Sorkin on CNBC’s “Squawk Box.” A recent survey shows that one in five likely voters hold crypto, which is a sizable voting bloc that candidates from both parties will want to court.

So get out and vote.