The Midterms Just Ended Web3’s Easy Ride in Washington

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The Democratic party won control of both houses of Congress and a huge swathe of statewide offices throughout the country. This is likely to impact all manner of public policy issues and debate in the United States for years to come. And while web3 did not feature as prominently in this election as it did in 2024, there are still likely to be many important consequences.

A lot of this requires working through a sketch of how the US government works. The US system is quite unique in that "parliament" (aka Congress) both holds and is aggressive in using its oversight powers over regulators and the parts of the government that implement policy. Further, and this is very important here, oversight is sliced up among a set of committees within Congress where the chair of each committee has an incredible amount of discretion over how the things inside their sphere of influence will be, um, supervised.

Web3 has traditionally been more closely aligned with the Republicans who just got, largely, run out of town. But the industry has made a concerted effort to reach out to the now-ascendant Democrats more recently. We think this is not going to help much for two reasons. First, the likely incoming chairs of the committees with the most relevant supervisory powers are not web3 fans. And there are too many long-standing, bad-smelling connections between people in the Trump camp and web3 that are likely to be subjected to long, thorough and unpleasant colonoscopies. Given the scale of these associations it is hard to believe nothing bad will emerge.

Significance

The US system has been remarkably stable with the same two parties dominating government back to the mid 19th century. So long term comparisons are possible in a way they really are not in other places. Democrats won a Senate seat in Kansas for the first time since 1932, the year of Franklin Roosevelt's landslide victory during the Great Depression. For many people reading this 1932 is so long ago your grandparents were not yet born.

Make no mistake: web3 was not an important issue in this election for most voters. And while there was a lot of noise and spending around web3 issues in 2024, and many web3 people voted based on industry issues, most voters did not care then either.

But the US system is one where you only really get to vote for package deals. There are few if any à la carte options. And party seniority matters a lot when it comes to policy decisions. So, for example, you might vote for a Democratic candidate with extremely pro-web3 views (more on that in a minute) and then discover they work on urban housing issues while a different member of the same party runs financial regulation policy. Or maybe you voted for a Republican who either won or lost. Either way regulatory policy is unlikely to be under the control of whoever got your vote.

This is the US system. So voters handed the parts of the Democratic party that will be looking at finance and banking and markets and all that a lot of influence over policy in those areas. Can they make laws and force them through over Trump's objections? No. The majority is not that huge. The majorities are not large enough to override a veto. But Trump said he was willing to work with Democrats, even as he threatened vetoes, and whether or not he means it, he knows he is not in a strong position to dictate terms to anyone.

And of course a Democratic House and Senate will hold all manner of oversight hearings and ask questions and try to make their opponents look bad. Unquestionably some untoward things have happened between the US government and web3 in the past few years just given the sheer number of interactions and amount of novel stuff that has happened. We are not pointing fingers anywhere specific, simply observing that there are surely some cockroaches in the back alley somewhere. The era of super-loose web3 regulation is over.

We will note that the only country with an even vaguely comparable stability is the United Kingdom. But even there political parties have proven far shorter-lived. The currently-ruling Labour party only dates to 1900. The party that led the United Kingdom into WWI disappeared in the 1980s. And the conservatives are old in some sense but despite the name have pivoted dramatically several times. This is not a column about Irish Home Rule. You can go google all of this surely if you care.

Implications

Oversight

About seven in ten voters said Congress was not doing enough to provide checks and balances on the president. This is catnip to a politician. People want them to be on TV (er, YouTube) asking tough questions and looking inquisitorial. People want them to be out there trying to look like crusaders for the taxpayer and common citizen. Politicians want to do that all the time. The likely Democratic Senate leader in 2027 is a man about whom even other politicians long joked "the most dangerous place in Washington is between Schumer and a television camera."

Politicians do not need invites to grandstand and talk on camera. Love of those activities is why they became politicians in the first place. And now voters are literally begging them to do more of it.

And we can expect a lot of web3-related hearings because Trump and the Trump family have been so directly involved in so much web3 stuff. Voters just slapped Trump down and asked the people they elected to do more oversight. It does not take a genius to figure out many people in the Trump orbit will be forced to answer uncomfortable questions on camera.

Regulation

We have long been skeptical that digital asset advocates in Washington DC really knew what they wanted. And of course web3 did not get the CLARITY Act passed this year. We also thought that was a bad piece of legislation that would only lead to more future fighting. Alas, it is now all but dead, and efforts will begin anew.

But the likely incoming head of the Senate Banking committee is Elizabeth Warren and she is not a fan of web3. Yes she is just one vote. But she does control the committee agenda and will have a lot of sway over proposed legislation in the relevant areas. The other big committee for web3 is Agriculture because that oversees the CFTC (for odd historical reasons). The woman who would have become chair next year, Amy Klobuchar, was just elected governor of Minnesota. The most likely candidate now is Senator Michael Bennet, who lost his bid to become Colorado's governor in June and who has strong views on tightly regulating web3 and is rated as very anti-crypto by Stand With Crypto.

One solid rule in politics is that politicians do not willingly hand away power. But Bennet would not be giving away his own power – he would be asking CFTC leadership tough questions in an effort to strip away power he does not believe they should hold. If anything, showing such strong oversight over the CFTC could be seen as Bennet bolstering his position. And, of course, he would be essentially passing this baton to Warren. Bennet might decide, wisely, that this is a great career move for him. Plus – there really are a lot of positives for Democrats to follow this reasoning – Bennet could get a two-for-one by restricting web3 and spending more time on gas and food prices and stuff voters definitely care about that everybody agrees is CFTC related.

Enforcement

In the US system enforcement is done by the executive branch. And we do not think Trump is going to direct the FBI, DOJ, SEC and all manner of other groups to immediately begin filing as many web3 cases as possible.

But the people in those parts of government are not stupid. Senior prosecutors often want to get elected to Congress. Many people in financial regulation want to make a name for themselves to get a high profile private or public sector job later. This is the system.

So we are likely to see a shift in enforcement priorities and style as everyone adjusts to the new political reality. Think about the kind of case that would satisfy many people. Maybe a business that got involved in a grey, maybe dark grey, area of gaming or financial services and relied on hiring a person from the Trump orbit (or family) for political cover would be worried. Of course Trump still holds formal control over the entire executive branch – but the protection can narrow from the affiliated business to just the person that was brought on as an advisor. Why would anyone expend dwindling political capital to protect businesses that hired their connections for cover?

The absurd Kalshi situation where Donald Trump Jr is an advisor and the CFTC has sued states that try to rein in prediction markets like Kalshi feels unsustainable. Don Jr is not on the hook for anything wrong here (and even if he is his father can probably pardon him). Expending dwindling resources on these efforts is going to stop. Trump does not care about web3 per se. He is not a libertarian or cypherpunk. Don Jr similarly does not care beyond treating these things as businesses to run or build or invest in like any other sort of business activity. The juice is no longer worth the squeeze.

So enforcement will restart. Slowly at first. Probably looking at politically-connected targets first. But who knows. There are all kinds of sanctions problems out there and there is not a lot of support for sanctions violations anywhere.

What To Watch

web3 was not at the top of any voter's preference list. So it is not going to get much time in the first few rounds of victory speeches and discussions of policy priorities. But it is probably the easiest area for the ascendant Democrats to score some points on the oversight front. And oversight absolutely was a top voter concern. Most voters do not care what Congress decides to oversee so long as it (re)starts overseeing something. Many (most?) voters have a limited understanding of the details of regulatory investigations and enforcement even in areas where they might be personally impacted. Let alone those areas with which they have at most a tenuous connection. Said more plainly: most voters do not really know what is going on. So if they want to see oversight and they see oversight and noise of something – especially if easy to understand bad things are found – they will feel they got what they voted for and support that person or party the next time around. This is, of course, all politicians' goal.

Yes, a lot of web3 backers have spent a lot of time and money hammering the Democrats while supporting Republicans. But a substantial fraction of the politicians listed as against crypto by Stand With Crypto got that rating simply for voting against CLARITY. That bill died, is dead, and quite a few people on that list are likely to run important oversight committees. This die is cast.

Yes web3 as a whole has made a recent effort to support both sides in an attempt to hedge against what just happened. But we view this as both too little too late and as something that could never overcome the significant undertow from the Trump-linked web3 investigations that are surely coming. There is no amount of money or support you could give the Democratic party to stop the onslaught of Trump investigations that are coming. Why? Because that is the raison d'être of the party for a while now. Trump and his party were rejected by the voters. The Democrats will want to tar every Republican they can with any Trump-linked dirt they can find to bolster Democratic chances in 2028. And the structure of web3's connection to the current US administration is such that there is no severing the link in time. Buckle up.