Crypto Regulatory Winds: Observations from the U.S. House of Representatives Crypto Hearings

Today the House Financial Services Subcommittee on Monetary Policy and Trade met to discuss crypto assets as money and their potential domestic and global uses. Unfortunately, the hearing was cut short but a few members  (listed here) were able to make statements and ask questions.

Andy Barr, Kentucky, Chairman

Roger Williams, Texas, Vice Chair

Brad Sherman, California

French Hill, Arkansas

Warren Davidson, Ohio

 

The guest panel included:

Rodney Garratt, NY Federal Reserve Bank

Norbert Micel, Heritage Institute

Eswar Prasad, Brookings Institute

Alex Pollock, R Street Institute

These types of hearings are a good opportunity to gauge the level of knowledge and the sentiment of policymakers, and identify potential regulatory policies we may expect for crypto assets. It’s often said that Bitcoin can’t be stopped because it’s decentralized. This resilience is overstated. While Bitcoin might not necessarily be stopped cold, as seen by market reaction to Chinese, Korean, and Indian regulatory changes, governments have power over an already volatile market. Even Google and Facebook’s changes to ad policies had the power to remove billions in market cap overnight. If draconian policies were instituted against crypto exchanges, there would likely be consequential and far-reaching negative impact on the future of crypto assets.

That being said, crypto assets are on a regulatory winning streak. Financial Industry Regulatory Authority (FINRA) approved Coinbase’s move to buy Keystone Capital Corp., Venovate Marketplace Inc., and Digital Wealth LLC in an effort to start listing crypto assets classified as securities. The Litecoin Foundation was approved to purchase a stake in German bank, WEG Bank AG, paving a significant onramp to mass market adoption of Litecoin.  This comes on the heels of the determination by the SEC that Bitcoin and Ethereum are not securities.  This is all great news, but bigger decisions are likely to be coming down the road, and crypto investors would be wise to pay attention to news from DC, Seoul, and Tokyo.

Here are the big takeaways from the hearing today:

Everyone is on board with blockchain technology and doesn’t want to get left behind.

Chairman Burr asked in his opening remarks, “Is this the future of money?”. Congressman Williams of Texas, also a tentative advocate called it “exciting” and that we need to be “mindful of innovation”. Even Congressman Sherman, who was openly hostile towards cryptocurrency (and alone), spoke positively of blockchain as a technology. China was mentioned several times, as well as European nations and their position on cryptocurrency and blockchain. Technological fear-of-missing-out (FOMO) is a very real thing.

We’re getting past the Ponzi scheme or scam argument.

Fortunately, the hearing did not revolve around the scam debate as most people have given that up. Very quickly it was apparent that this was not what the government should do about protecting foolish investors from “crazy internet money’, and more about the legitimate coming competition between fiat and crypto. They accept the technology as a real thing and have honest debates on where crypto fits into the economic future. There were thoughtful questions on the nature of currency and what money is.

The real debate is whether or not the central bank should compete with Bitcoin.

Garratt believes that people will naturally transition to digital currency because of the ease of use versus cash. Payments are getting faster and traditional fiat currency can’t keep up. There was general agreement that cash is dated, the future is digital, and we need to think about what the appropriate response of the government should be to this competition. Should the federal government launch its own crypto dollar in order to compete with the speed and cost efficiencies of crypto? Micel spoke strongly against this as the “death of economic freedom” that would “nationalize the credit market with government overreach”.  Micel also made the point, twice, that capital gains converted to U.S. dollars from crypto denominations is an unfair and burdensome policy that holds back investment and innovation in the space.

Prashad also presented a more measured, nuanced coexistence of crypto and fiat with a vision of the future in which crypto is not replacing the U.S. dollar. As he stated,

“The demand for Bitcoin as a store of value rather than as a medium of exchange has stoked discussion about whether such cryptocurrencies could challenge that role of traditional reserve currencies. It is more likely that….decentralized nonofficial cryptocurrencies will start playing a bigger role as mediums of exchange”

As a non-bitcoin maximalist not seeking to overthrow the economic clout of the U.S. and the benefits of the dollar, I prefer this vision. Crypto will fill and improve the significant niches of the economy, fix real-world problems, and introduce efficiencies. And if this hearing sentiment holds true, we will witness a regulatory light touch as we foster and encourage innovation and technology that strengthens the U.S. and global economy.

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