Brian Brooks, chief executive officer of Bitfury Group Ltd., left, speaks during a House Financial Services Committee hearing in Washington, D.C., U.S., on Wednesday, Dec. 8, 2021. Photographer: Stefani Reynolds/Bloomberg
Yesterday six crypto leaders appeared at a House Financial Services Committee hearing titled “Digital Assets and the Future of Finance: Understanding the Challenges and Benefits of Financial Innovation in the United States,” which explored how the government should oversee and improve regulation of the industry.
The general sentiment of the hearing was positive towards the cryptocurrency industry, a dramatic shift from past years. This disposition surprised some, but it reflects an evolving view of the benefits of cryptocurrency technology and the fear that the US is falling behind other countries such as China that have made noticeable progress towards launching a sovereign digital currency.
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Witnesses generally called for greater regulatory clarity, especially based on how token and lending projects are currently regulated by the Securities and Exchange Commission (SEC), and ways the industry would benefit from having one prudential regulator rather than the various regulatory agencies that have overlapping mandates. Interestingly, the industry’s perspective was able to dominate the hearing testimony because no critics of cryptocurrency were among the witnesses.
The day’s discussion centered on resolving the lack of clarity the cryptocurrency industry faces, especially with regulators like the SEC applying old law to the new technology. As a reminder, the Howey Test that is applied to token projects to determine whether one is a security is based on Supreme Court case law from 1946 about orange groves. SEC Chairman Gary Gensler has tried to rein in digital asset activities because he says many of the products resemble securities or investment contracts that fall under his jurisdiction and is concerned by consumer protection and market manipulation.
Brian Brooks, CEO of Bitfury, a cryptocurrency mining company and former Comptroller of the Office of Comptroller of Currency, described the SEC’s approach as an impediment to cryptocurrency startups. Mr. Brooks indicated that the US regulatory climate has driven legitimate activity offshore, harming the U.S.’s competitiveness in both the technology and capital markets sector.
“What happens in the United States is you have a new crypto project and you walk into the SEC and you describe it in great detail and you ask for guidance and they say, ‘We can’t tell you,’ and you list it at your own peril,” Brooks said.
Much of the hearing explored the potential for dollar-backed stablecoins or a CBDC to ensure the dollar remains the international standard.
In Circle’s CEO Jeremy Allaire’s opening statement, he stated his belief that the U.S. should promote the use of the dollar as the primary currency of the internet, and how USDC (a stablecoin overseen by Coinbase and Circle through the Centre Network) is helping to pave the way for digital dollars to be the leading currency of the internet. Charles Cascarilla, CEO and co-Founder of Paxos Trust Company also focused parts of his opening statement on the advantages that cryptocurrencies, and more specifically stablecoins, have on the existing financial system. Cryptocurrencies and stablecoins improve the deficiencies of the current expensive and slow system, that leaves millions un and underbanked.
Discussion also explored how not all stablecoins are created equal. USDC and the Paxos Dollar are stablecoins issued in connection with heavily regulated exchanges like Circle, Coinbase and Paxos. They are only backed by cash and cash equivalents such as U.S. Treasury bonds. Other stablecoin projects, such as Tether, the largest in the world, have gotten in hot water over the last few years with allegations of market manipulation and false claims regarding reserves backing the coin. In February, Tether settled with the New York Attorney General over allegations that it lied about the reserves backing the coin. The CFTC earlier this month ordered Tether to pay $41 million over similar claims. The SEC is reportedly also investigating various Stablecoin projects.
Despite the brohomie certain Democrats, such as Sherman and Velasquez, showed some skepticism citing the financial risks of cryptocurrency and Republicans, such as McHenry and Hill, largely called for taking a cautious approach to enacting new laws. But while certain media outlets tried to promote the narrative of a partisan divide over how to approach the industry, many in the industry actually noted that party lines did not generally seem to dictate how members approach cryptocurrency regulation.
This included Jeremy Allaire, CEO of Circle who tweeted, “Some of the quick reads I’ve seen from media coverage does not reflect I think what we all felt from the conversations. Crypto, stablecoins, and markets are not partisan issues. The level of engagement was high, and members were taking this very seriously. Very thoughtful questions on so many issues from so many members, across the aisle. There was a real commitment to engaging and understanding.” Many Democrats seemed open to the technology and the potential it brings.
Even the American Bankers Association submitted a comment about the hearing and said it welcomed the hearing and its recognition that more work is needed on the rules for digital assets. The American Bankers Association said in a letter to the committee that firms offering bank-like services should receive bank-like regulation.
According to a recent survey, 16 percent of Americans said they used cryptocurrencies such as Bitcoin and Ether.
In general, the main takeaway from today was positive for the future of regulation in the industry. Members of congress heard input on the promises of cryptocurrency and blockchain technology to speed up and cut costs of traditional payment rails and the revolutionary qualities of decentralization that would help individuals take back control of the Internet from giants like Google. This “Web 3.0” concept is a key part of the crypto lobby’s pitch in Washington.
That said, Washington is not done with crypto just yet. The Senate Banking has a hearing on stablecoins next Tuesday and it will likely be more skeptical towards this emerging asset class. Unlike yesterday’s hearing, there will be less industry advocates and non executives from cryptocurrency industry. The witnesses will be: Ms. Alexis Goldstein, Director of Financial Policy, Open Markets Institute; and Professor Hilary J. Allen, American University Washington College of Law. Additional witnesses may be added at a later date.