Cryptocurrency flash dimming

Just a few months ago, cryptocurrency enthusiasts were hopeful that Washington was warming to digital assets. But cyberattacks demanding bitcoin ransoms, wild trading and rebukes from regulators have eroded their optimism.

The timing couldn’t be worse. Policymakers are poised to make a number of critical rulings on virtual tokens in the coming months — decisions that may reveal how deep of a hole the industry has to climb out of. Potentially under consideration are whether to approve a Bitcoin exchange-traded fund, allow cryptocurrency mutual funds and grant banking licenses to financial firms.

For advocates, the setbacks are fueling anxiety that some of their top priorities will be blocked by federal agencies, and that lawmakers will take a tougher tack on oversight. Evidence is growing that Capitol Hill is moving in that direction. Sen. Mark Warner, D-Va., said last month that cryptocurrencies are “crying out for some level of regulation.” Sen. Elizabeth Warren reiterated that view Wednesday.

“Our regulators, and frankly our Congress, are an hour late and a dollar short,” the Massachusetts Democrat said in a Bloomberg TV interview. “We need to catch up with where these cryptocurrencies are going.”

The rough patch started in May when Securities and Exchange Commission Chairman Gary Gensler urged lawmakers to pass a law regulating cryptocurrency exchanges, arguing that the lack of oversight posed a serious threat to U.S. investors. The comments shocked Bitcoin proponents who predicted Gensler would be an ally because, unlike most government officials, he’s well-versed in virtual coins.

Then the Colonial Pipeline Co. hack happened in early May, which triggered fuel shortages across the Eastern U.S. As in previous breaches, the culprits demanded ransom payments in bitcoin — shining a spotlight on cryptocurrencies’ national-security implications. Long gas lines predictably attracted the attention of lawmakers and the scrutiny could make some on Wall Street nervous about further embracing assets that are routinely linked to illicit transactions.

The Justice Department recovered most of the tokens that Colonial paid out by tracking transactions on the public ledger for Bitcoin, showing how the technology is traceable and can aid law enforcement agencies.

While the digital currency can be created, moved and stored outside the purview of any government or financial institution, each payment is recorded in a permanent fixed ledger, called the blockchain.

That means all bitcoin transactions are out in the open. The bitcoin ledger can be viewed by anyone who is plugged into the blockchain.

“It is digital bread crumbs,” said Kathryn Haun, a former federal prosecutor and investor at venture-capital firm Andreessen Horowitz.

Haun added that the speed with which the Justice Department seized most of the ransom was “groundbreaking” precisely because of the hackers’ use of cryptocurrency. In contrast, she said, getting records from banks often requires months or years of navigating paperwork and bureaucracy, especially when those banks are overseas.

Still, Warren said a key feature of cryptocurrencies is that they allow people to secretly move money, making the coins a “haven for criminals.” A reminder of her point occurred Wednesday when Brazil’s JBS SA disclosed that it had paid $11 million to hackers who forced the world’s largest meat producer to shut down all its U.S. beef plants.

Another issue: Bitcoin has lost more than a third of its value since early May. A series of negative tweets from Elon Musk has contributed to the plunge, underscoring to cryptocurrency critics that token prices are too volatile and easily influenced by social media to be safe for unsophisticated investors. The frenzy tied to nonfungible tokens and dogecoin — a cryptocurrency created as a joke — has amplified those concerns.

“We can’t deny the potential impact that a negative media narrative might have on the regulatory and legislative conversations in D.C. in the short term,” said Kristin Smith, executive director of the Blockchain Association trade group.

Much of high finance’s focus is on Gensler, who previously taught courses on digital currencies at the Massachusetts Institute of Technology, because the SEC will determine whether a bitcoin exchange-traded fund can trade on U.S. exchanges.

The product is seen as a game changer because it would let investors trade in-and-out of the world’s most popular cryptocurrency throughout the day without exposing them to the risks of having to store their tokens. Adding another layer of safety, consumers could buy exchange-traded funds from tightly policed brokers instead of purchasing bitcoin from unregulated exchanges. And mutual funds and other institutional investors could pump a lot more money into cryptocurrency-related assets through the funds.

An SEC spokeswoman declined to comment.

Information for this article was contributed by Ben Bain and Robert Schmidt of Bloomberg News (WPNS) and by Nicole Perlroth, Erin Griffith and Katie Benner of The New York Times.