July 18 proved to be an important day for the crypto industry, as two separate U.S. Congress hearings centring the matter were held: one by the House Agriculture Committee, and the other one by the House Financial Services Committee.
The two stroke completely different tones: while the latter echoed the most conservative sentiments regarding the realm of crypto (with the somewhat obligatory call for a blanket ban), the former seemed more positive, as the board of experts provided the regulators with collected considerations bothering the industry. Nevertheless it’s the House Agriculture Committee hearing we should focus our attention.
The panel of witnesses was comprised of six industry representatives and academics:
Joshua Fairfield. Law and technology scholar specializing in digital property, electronic contract, big data privacy, and virtual communities. William Donald Bain Family Professor of Law.
Amber Baldet. Co-Founder and CEO of Clovyr startup, which essentially functions as a decentralized app store. Former lead at JPMorgan Chase’s Blockchain Center of Excellence (BCOE).
Scott Kupor. Managing partner at Andreessen Horowitz, a private American venture capital firm.
Daniel Gorfine. Director of LabCFTC, a branch of Commodity Futures Trading Commission (CFTC) agency aimed at promoting “responsible FinTech innovation”.
Gary Gensler. Senior Lecturer at the MIT Sloan School of Management. Predecessor of Christopher Giancarlo, current CFTC chairman (aka “crypto dad”). Former co-head of Finance at Goldman Sachs.
Lowell Ness. Managing Partner at Perkins Coie LLP, an international law firm.
Congress’ “vested interest” in crypto: opening statement
The House Agriculture Committee hearing dubbed “Cryptocurrencies: Oversight of New Assets in the Digital Age” was lead by Chairman Michael Conaway, a Republican representative for Texas’s 11th congressional district. Prior to the hearing, he issued the following statement:
“This hearing will shed light on the promise of digital assets and the regulatory challenges facing this new asset class. Our committee has a deep interest in promoting strong markets for commodities of all types, including those emerging through new technology.”
Thus, a rather positive attitude towards crypto was set from the very start by Conaway, who also explained why the House Agriculture Committee might be curious about the subject at all:
“[We] have a vested interest in shaping and constructing the definition of a security, because it directly impacts the definition of a commodity.”
Below are the keypoints and arguments extracted from the hearing.
Digital asset’s regulatory status might be fluid
Both scholars present, Gensler and Fairfield, have addressed perhaps the main question troubling US regulators: what is a Bitcoin? Currently, different US agencies view digital assets differently: for instance, the Securities and Exchange Commission (SEC) treats them as securities, while Commodity Futures Trading Commission (CFTC) considers them commodities.
Now, the witnesses proposed that a digital token’s legal status is in fact fluid: when it is marketed at a “pre-functional” moment in its development — i.e. during an Initial Coin Offering (ICO) — then the sale at that moment is an investment contract and thus a security, lying in the legal field overviewed by the SEC.
Further, when crypto tokens are realized and become used in a decentralized network a commodity becomes relevant to the CFTC. That could settle the Ethereum dilemma: last spring, the token was rumoured to be classified as a security. However, in that case its ICO that was held years prior to that would be deemed illegal (as it was not registered with the SEC at the time), and therefore the whole asset would become compromised, a scenario Gensler deemed dangerous for the industry.
Former CFTC chairman then proposed that state of the current state of cash-crypto markets resembles “at best a wild west,” and that the CFTC potentially requires more authority and resources to deal with the challenge. The SEC, for its part, could need 2-4 years to address the “thousands” of “noncompliant” actors in the ICO space, he argued.
Fairfield expressed a similar point of view, suggesting that the 70 year old Howey Test which the SEC applies to determine the purview of its jurisdiction, should be dismissed:
“Should tokens be deemed proper under the Howey test? I believe that we should look to the outer bound to figure out what beneficial and damaging uses the technology presents. Look to how the communities are using it –then regulate.”
Ness of Perkins Coie law firm contributed by claiming that over-aggressively extending securities classifications could seriously disturb the crypto space, which has evolved to cater value transfers “at the speed of software.”
“Bitcoin is law enforcement’s best friend”
When the committee members voiced their concerns regarding crypto’s involvement in illicit activities, Kupor of Andreessen Horowitz argued that “Bitcoin is law enforcement’s best friend,” given that pseudonymous transactions can ultimately be traced using intelligence tools that analyze traffic on the blockchain, a ledger famous for its transparency.
“Bitcoin is actually the worst tool to money launder, because every transaction is registered and [recorded]”
Similarly, Ness remembered that “the alleged Russian hackers were caught because they used Bitcoin,” in reference to the recent indictment that charged twelve Russian nationals with using crypto to fuel their efforts to “interfere” in the 2016 U.S. presidential elections.
Blockchain’s heroic deeds didn’t go unnoticed, although the technology is still mature
Fairfield stressed that “the potential value of blockchain technology is considerable”, and outlined seven examples of the technology’s success in different areas, including: corporation strategies, immediate and international payments, digitizing securities, secure transactions and transparent voting systems that would minimize the risk of facing another international scandal after a major election.
In her speech, Amber Baldet, former lead at JPMorgan Chase’s Blockchain Center of Excellence, also addressed the technology, although reminded that blockchain is not mature enough to be the ultimate solution to every single problem, voting included:
“When it comes to electronic voting, we need to take extreme caution, as we aren’t ready to tackle the complex computer science and coordination problem.”
Decentralization is not a serious problem for mainstream adopters
The panel of witnesses addressed the issue of decentralization, an aspect that often seems problematic in the context of mass adoption and regulation. However, as the experts suggested, there is no substantial hindrance on the way: Gensel called it a “natural irony” that the underlying technology is decentralized, but the industry has turned out to be concentrated in few hands: i.e. major centralized exchanges, such as Coinbase.
Similarly, Gorfine of LabCFTC noted that while the crypto technology allows for peer-to-peer transactions, “most activity takes place through a new type of intermediary where you can apply AML and KYC rules”.
Congressman Conaway summarized:
“As long as the stupid criminals keep using bitcoin, it’ll be great.”
Financial autonomy and inclusion: international experience
Amber Baldet argued that the US market is still largely unregulated, urging to notice other countries’ experience with the technology. She outlined Malta and Switzerland with its “Crypto Valley” as prime examples of positive adoption, and mentioned initiatives in other countries that are less known for championing the technology, like Afghanistan where Roya Mahboob, CEO and co-founder of Digital Citizen Fund, enrolled over 9,000 Afghan women and girls in education programs.
Room for skepticism
Republican congressman Collin Peterson seemed to be the less convinced about cryptocurrencies in the room. “So they are just printing money out of nowhere?”, he exclaimed at one point.
He then proceeded with the mandatory comparison of crypto space to a “Ponzi scheme,” and asked what backs Bitcoin’s value. Former CFTC Chairman Gensler parried:
“There’s really nothing behind gold either … what’s behind it is a cultural norm, for thousands of years we liked gold… We do it as a store of value, so bitcoin is a modern form of digital gold. It’s a social construct”.
Not for regulations, albeit not the “hasty ones”
While the overall tone of the hearing suggested that positive regulation (or, as Gensler put it, “clearer”, not overly harsh regulation) would help the industry thrive, CFTC’s Gorfine argued that the government should avoid proceeding with rushed decisions:
“… While some may seek the immediate establishment of bright lines, the reality is that hasty regulatory pronouncements are likely to miss the mark, have unintended consequences, or fail to capture important nuance regarding the structure of new products or models.”
The House Financial Services Committee hearing: call for a crypto ban, CBDCs are “one of the worst financial ideas”
Meanwhile, a parallel congress hearing’s discussion was not that fruitful for the industry, as the head of the Federal Reserve Jeremore Powell deemed cryptocurrencies as “dangerous of investors”, congressman Brad Sherman (the same one who called cryptocurrencies “a crock” in the past) went as far as to suggest “prohibit[ing] U.S. persons from buying or mining cryptocurrencies”, and Alex Pollock, senior fellow at the R Street Institute, argued that “to have a central bank digital currency is one of the worst financial ideas of recent times”