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Silicon Valley's top vc: A16Z is aggressive but not aggressive in the crypto industry

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Some of the crypto startups funded by A16Z are being set up as a new type of physical organization called a "decentralized autonomous organization," or DAO

Big Hires,Big Money and a D.C. Blitz: A Bold Plan to Dominate Crypto

Eric Lipton,Daisuke Wakabayashi and Ephrat Livni

Nien Qing, Richard Lee

Tomicah Tillemann (left) worked as an aide to President Biden when he was a Senator, and Jai Ramaswamy, a former Justice Department official, was part of the team that pushed the A16Z encryption agenda in Washington. Source: The New York Times

Lunch with Senator Kirsten Gillibrand of New York at a French bistro near the Capitol; Meeting with some of The president's top economic aides; This was followed by a private dinner with a key financial regulator.

These social themes are always the same: "How to win the future in the race for global cryptocurrency dominance" -- at least according to Andreessen Horowitz, the Silicon Valley venture capital firm that dispatched a panel of Washington insiders to make its case during a recent five-day lobbying blitz.

At a time when tech companies are notorious in Washington, and as the fast-growing crypto industry comes under increasing scrutiny from lawmakers and regulators, Andreessen Horowitz is pursuing a bold plan:It needs both a large share of the emerging world of digital money and a hand in setting the rules of how it works.

To advance its agenda, the company has hired a cadre of experienced government officials. Among them are Tomicah Tillemann, a former Aide to Biden in the Senate; Katie Haun, a former cryptocurrency prosecutor at the Justice Department; and Brian D. Quintenz, who joined the effort days after leaving the Crypto regulator, the Commodity Futures Trading Commission.

Andreessen Horowitz -- also known as A16Z -- has invested in at least 50 crypto startups and announces several new deals each week, making it the largest crypto investor in the world.

This summer, A16Z set up a new $2.2 billion investment fund to capitalize on the rapid growth of cryptocurrencies and the technology and financial architecture behind them.

A16z is also a major investor in Coinbase, one of the largest cryptocurrency exchanges, as well as in a number of startups. The company recruits so many people with industry-specific backgrounds that its hiring spree has become the talk of the town on Twitter.

The vision pursued by Marc Andreessen and Ben Horowitz, the founders of A16Z, is to be at the centre of a burgeoning new ecosystem of digital technology that will disrupt industries as diverse as art, banking, finance, gaming, ecommerce, music, social media and telecoms.

Their regulatory proposals highlight issues broadly supported in bipartisan US policy: overcoming China's lead in digital currency and payments, reasserting America's position as a leader in technological innovation and expanding economic opportunity.

"To the extent that policy makers can have better information as a result, that will help solve the problem and enable the next generation of the Internet to flourish in a way that benefits us." "It's good for both sides," says Mr Tillemann.

But outside experts who have studied the A16Z proposals say they are more about self-interest than social or national interest.

Lee Reiners, former regulator of systemically important financial institutions at the Federal Reserve Bank of New York, said:"It's a very naked, transparent attempt to profit from it."

Draft legislation being circulated by A16Z would support its portfolio companies by exempting the entities from some tax filing, consumer protection and anti-money laundering requirements.

"This is a classic case of letting the fox design the henhouse," said Rohan Grey, a financial lawyer and law school professor who has advised Congressional Democrats on legislation to regulate digital payments pending in the House of Representatives. "The way they talk sounds reasonable, but essentially it's hard for them to give up something for the public good."

Rachael Horwitz, a spokesman for A16Z, said it welcomed the debate. "We are placing a big bet on founders and ideas that have the potential to shape the future, to overthrow the gatekeepers and middlemen of the past," she says.

Since its founding in 2009, Andreessen Horowitz has promoted a different approach to venture capital -- the cult of the founder, the idea that hard-working entrepreneurs are the most capable entrepreneurs and leaders, Rather than just helping with funding, recruiting, sales and marketing.

This view is a doctrine rooted in personal experience. In 1994, Andreessen, a 22-year-old computer science graduate of the University of Illinois at Urbana-Champaign, helped create Netscape, the first popular Web browser; Horowitz joined Netscape at a time when the company was at war with Microsoft, which dominated the PC market and deliberately restricted access to browsers. Netscape was sold to AOL in 1998 for $4.2 billion, and a year later the two founded an early cloud computing company that was sold to HP in 2007 for $1.6 billion.

Marc Andreessen

As venture capitalists, Andreessen and Horowitz aggressively raised money and outbid rivals, taking early stakes in Facebook, Twitter, Pinterest, Airbnb and Slack. Andreessen defines this approach as "us versus the world."

Andreessen Horowitz cites Creative Artists Agency, a Hollywood talent-management firm, as a model for its ambition to represent every Hollywood star.

"The goal is essentially monopoly," CAA co-founder Michael Ovitz said in April during a discussion with Andreessen and Horowitz about Clubhouse, an audio app powered by the A16Z. The two asked him to explain his agency's impact on the A16Z.

A16z made its first cryptocurrency investment in late 2013, initially placing a $20 million bet on Coinbase. Not long after, Andreessen wrote in an opinion piece for The New York Times that Bitcoin, the world's first cryptocurrency, heralded a technological change as transformative as the personal computer in the 1970s and the Internet in the 1990s.

"Bitcoin offers a new perspective on the financial system in the Internet age and a broad vision of how it works," Mr. Andreessen wrote.

The A16Z stake in Coinbase, which went public in April, is worth nearly $11 billion.

In 2018, A16Z launched its first fund dedicated to crypto investments, raising $350 million. The fund is a separate legal entity that follows securities rules that limit the allocation of venture capital firms to riskier investments such as cryptocurrency businesses.

But seeing the growing potential of cryptocurrencies, in 2019 A16Z transformed itself from a venture capital firm to a registered investment adviser -- a costly move that brought it under tighter regulation but allowed it to trade crypto unchecked.

A16z created a second $515 million crypto fund in 2020 and a third $2.2 billion fund this year.

A16z executives quickly realized that to make a decent return on these investments, they would have to play an important role in setting the rules for these companies.

Turn to Washington

As the sun sets, the sound of military helicopters occasionally drowns out the conversation at an A16Z cocktail party on Washington's waterfront. Most of the company's newly hired policy team attended, hanging out on the terrace and sipping crab cakes and drinks at the end of a five-day campaign.

In the race game to influence Washington, there is no lineup of other cryptocurrency players comparable to a16Z's lobbying team.

Ms Haun, who launched the Washington lobbying effort, is a co-director of a16Z's $2bn cryptocurrency fund. While at the Justice Department, Haun helped prosecute two undercover federal agents who stole hundreds of thousands of dollars' worth of Bitcoin from silk Road, an illegal dark web marketplace he was investigating.

Katie Haun

Katie Haun, who joined A16Z in 2018, this summer recruited Tillemann, who is now the group's lead lobbyist in Washington.

Other new members include William H. Hinman, former director of the Securities and Exchange Commission's Division of corporate Finance; Brent McIntosh, a former deputy Treasury secretary in the Trump administration; and Jai Ramaswamy, who led the Justice Department's money-laundering division during the Obama administration. All of them, along with Mr Quintenz, who became an outspoken advocate of encryption while at the COMMODITY Futures Commission (CFTC), have attended briefings with financial regulators, members of Congress or White House officials.

But none of them registered as "lobbyists." Tillemann argues that lobbyists do not fit with what they do in Washington. "We don't think we need a lobbying team right now, and we don't see these actions as a lobbying effort," he said. He called it "an opportunity to work constructively with policymakers to address issues of common concern."

Company officials argue that because of a loophole in current lobbying rules, its representatives are not required to register as lobbyists. (Under the Lobbying Disclosure Act, a lobbyist must spend 20 percent or more of his or her time with clients.)

In presentations in Washington, A16Z team members often talk about their commitment to "democratizing" the Internet. They say the decentralized nature of cryptocurrencies will make it easier for more people to access loans and investments through crypto platforms like Compound and Uniswap, which are supported by A16Z.

Cryptocurrencies, they say, will allow artists, musicians and influencers to sell their work using NFT through a16Z-backed platforms like Open Sea, free from the high fees of middlemen. NFT can prove ownership of a particular digital artwork or music.

Ben Horowitz

But Mr. Reiners, Mr. Grey and Dan Awrey, a professor at Cornell Law School and an expert on financial regulation who advises global financial institutions, said they were troubled by many of the plan's key points.They say the proposal is essentially self-serving, putting consumers at a disadvantage by circumventing existing rules.

They point to a provision included in the proposed legislation that would exempt some crypto firms from the Investment Company Act of 1940, which provides for commercial firms to be overseen by the SECURITIES and Exchange Commission (SEC). Certain crypto start-ups funded by A16Z are being set up as a new type of entity called a "decentralized autonomous organization," or DAO, which would be exempt from the act under A16Z's plan.

A16z argues that this exemption is justified because the DAO is allegedly run by a community of crypto users rather than profit-seeking big capitalists. In practice, however, the financial backers behind these platforms can still make handsome profits, as the founders of crypto startups often own a large share of specific crypto tokens, which in some cases grant voting rights to help manage the platforms.

The A16Z proposal would also limit the CFPB's ability to regulate DAOs. Instead, it recommends that the federal government consider relying on industry "self-regulatory organizations" to define and enforce consumer protection measures. In addition, the proposal would give DAOs preferential tax treatment, reduce their disclosure obligations to the IRS, and provide tax exemptions for membership fees charged by DAOs.

Experts say a16Z's proposals, if implemented, would open up loopholes for the agency, other financial industry players and even hedge funds to restructure themselves in ways that could undermine the existing system of financial regulation.

"In the name of financial democratisation, what I see is a card game where they move the ball around and hope people don't understand that the game is rigged," Says Mr Awrey."What they're calling for here is a blanket exemption from some of the most important investor protection laws in the COUNTRY."

In a 10-page response provided by the company to The New York Times, an A16Z lawyer wrote: "We welcome feedback on how to tighten these exemptions so that they do not exceed what is actually intended."

The White House and members of Congress declined to discuss in detail their meetings with a16Z representatives. But industry companies say A16Z's efforts in Washington are part of what makes it an attractive investment partner.

"The law is the law, the only question is how to apply it,"Said Ian Lee, co-founder of Syndicate. Syndicate, a crypto startup, chose A16Z as the lead investor in a funding round in June. "That's a big reason working with A16Z and its legal and regulatory teams is so significant."