The US Senate Banking Committee held a hearing today entitled Examining Regulatory Frameworks for Digital Currencies and Blockchain. The Hearing is part of an ongoing process of education and understanding regarding the emerging digital asset ecosystem and the technology that supports it.
Earlier this month, both the House and the Senate held hearings on Facebook’s announced crypto Libra. David Marcus, Facebooks lead on Libra and the Calibra wallet, took a bit of a beating in both chambers of Congress. While Marcus came across as somewhat ill-prepared and evasive, the witnesses at today’s hearing were more clear-cut in their opinions.
Banking Committee Chair, Senator Mike Crapo, opened up the hearing stating that digital technology innovations are inevitable. These innovations could be beneficial:
“I believe that the U.S. should lead in developing these innovations and what the rules of the road should be,” said Crapo.
The Senator expressed his intent to better understand how the technology operates and how blockchain may better serve consumers.
“I look forward to learning more about: the encryption and networking features behind blockchain technology and how that technology enables digital currency transactions; ways that the market for digital currencies has grown and evolved over the last decade; different types of digital currencies in the marketplace, including their key differences with Facebook’s proposed digital currency,” said Senator Crapo, seeking to ascertain the balance between innovation and appropriate regulation.
Senator Sherrod Brown, Ranking Member on the Committee, was more skeptical. Brown hammered Facebook in the prior hearing and he revisited similar themes in his opening statement.
Senator Brown claimed that big tech and big banks are “hiding behind innovation.” Brown drew a parallel to a previous innovation, sub-prime mortgages, which helped to slam the economy into recession:
“Just like Facebook – which claims its new currency will help the unbanked and underbanked – these mortgages were supposed to help people who never had access to credit achieve the American dream of homeownership,” Senator Brown stated. “In reality, those mortgages ripped off millions of families who ended up losing their homes, they wrecked the economy, and they made the staggering inequality in this country even worse.”
Brown readily acknowledged the shortcomings in the current banking and payments system, but the Senator questions as to whether the private sector is the solution.
”… some infrastructure works better as a public good, and we shouldn’t let Big Banks or Big Tech get their hands on it,” said Brown. “The Federal Reserve and other watchdogs need to continue to be leaders in banking innovation. And if we don’t move quickly to improve important infrastructure – not just roads and bridges, and highways and water sewer systems, but our payments systems, too. If we don’t move quickly to improve it, we’ll end up with big corporations that have broken our trust again and again and again, and frankly, I don’t think that makes any sense.”
Jeremy Allaire, CEO and co-founder of Circle who was present on behalf of the Blockchain Association, opened up the discussion with a prepared statement emphasizing regulatory compliance. Far better prepared than Marcus at the Facebook hearing, Allaire explained they want regulation and consumer data protection. His industry is simply seeking greater clarity in regulation.
Allaire turned the tables a bit noting that the traditional financial system is peppered with money laundering and criminal activity. Something which could be better managed using blockchain tech.
“Our existing financial system is built on legacy technology that is riddled with privacy violations and data breaches,” said Allaire. These are words for the moment as Capital One has just announced an enormous data breach where 100 million users saw their information pilfered.
Professor Mehrsa Baradaran of the University of California, Irvine School of Law, targeted the profound shortcomings of the existing financial system:
“Banks have abandoned certain low-profit communities and customers, ” said Prof. Baradaran. In the US, there are too many “banking deserts” forcing low-income people to depend on check cashing services and payday loans. These services gouge users and tax a segment of the population which can ill afford the added cost.
But Prof. Baradaran is of the opinion that the Federal banking system must be reformed. Same-day or real-time payment capabilities already exist, so why not make it available for the retail market? Do we really need a Libra?
“The Federal Reserve should open up the payment system to individuals. Blockchain is not the best path,” according to the Professor.
“Our failure to move forward with a real-time payments system is costing consumers billions of dollars,” added Senator Van Hollen.
Many of the questions addressed the Facebook/Libra enigma which colored much of the discussion. Facebook, in some respects, has undermined the entire industry as the focus has shifted from enabling innovation to stymieing data abuses and malfeasant operations. Facebook’s brash attempt at creating a self-sovereign global currency has become a crypto trap.
Yet, even in the shadow of Facebook’s ill-fated stablecoin dreams, Senator Mark Warner believes that blockchain, or distributed ledger technology, has “great potential.”
Perhaps the most encouraging portion of the Senate Hearing for the crypto advocates was the discussion on advancements in other competing jurisdictions.
Dr. Rebecca M. Nelson, a Specialist in International Trade and Finance at the Congressional Research Service (CRS), said there is a patchwork of national regulations in a sector that is “global in nature but regulated at the national level.”
Some countries are striving to become crypto hubs. Others have banned or restricted the utilization of crypto, said Dr. Nelson.
“Other jurisdictions are out ahead of the US,” said Dr. Nelson. “Yes, they [blockchain innovators] are leaving [the US].”
Dr. Nelson believes that blockchain innovators are exiting the US not to avoid regulation but due to the lack of applicability in domestic rules. These companies are not trying to shirk regulation but it is hard to argue with a need for clarity of law.
Allaire commented on Circle’s recent decision to operate a portion of their business in Bermuda:
“As we looked at our expansion internationally … there are opportunities outside the US that are larger. We looked at all of the jurisdictions… We wanted a high bar from a regulatory perspective.”
Allaire wants to operate in a jurisdiction where fundamental risks are being supervised, including custody risk.
“In the US, there is an incredibly gray area which makes it difficult to operate.”
So who should regulate crypto? Asked Senator Brown. Well, that depends. If it is a security, or a commodity, existing regulators clearly have oversight. But if a different type of digital asset or service emerges? Well, that’s not quite as clear, hence the question.
Senator Jon Tester said this is coming and they need to be ready for it adding that he doesn’t think they are going to leave blockchain tech and digital asset oversight entirely up to regulators – perhaps foreshadowing forthcoming legislation.