US Congress schooled on digital assets
By Daniel Tyson
20:23, 8 December 2021
The top brass of leading digital asset firms went to Washington on Wednesday to highlight the industry’s contribution to the economy and ask for clearer regulations from US Congress and federal regulatory agencies.
For more than five hours, the CEOs testified about the positive impact of cryptocurrency and blockchain technology and to dispel the image of a wild-west attitude towards regulation and guidelines.
Leaders from the digital asset giants – including Circle, FTX, Paxos Trust Company, Stellar Development Foundation and Coinbase – asked Congress to pass legislation giving cryptocurrency regulatory authority to one federal agency, instead of the many overseeing the industry now.
Currently, the Securities and Exchange Commission regulates spot markets for securities and the Commodity Futures Trading Commission oversees derivatives markets. However, neither agency has oversight authority on the commodity spot market, for cryptocurrencies such as Bitcoin and Ethereum.
Red tape from multiple US states
Additionally, some cryptocurrency market exchanges and stablecoin issuers must obtain licences for state money transmitter and sale of cheques from multiple states.
At least three cryptocurrency companies have obtained conditional approval for national trust bank charters from the Office of the Comptroller of the Currency, according to a committee hearing memo.
“A successful policy framework would allow crypto platforms to offer both spot and derivatives trading on crypto assets under one unified system, with one rule book and one technology platform to manage risks related to all trading activity in customer accounts,” Sam Bankman-Fried, CEO of FTX, said during testimony before the House Financial Services committee.
The executives hit on two major themes during their testimony: digital assets are here to stay and it's not the wild, wild west, as many in Washington believe.
“Stablecoins and internet-natural capital markets are not too big to fail, but they are now too big to ignore,” said Jeremy Allaire, Circle’s CEO.
According to the hearing memo, the capitalisation of stablecoins reached nearly $147bn as of November, up more than 500% since November 2020.
Never the wild west
The SEC and the Biden administration worry digital banking is vulnerable to fraud, manipulation and abuse. In November, federal regulators requested Congress to “act promptly to enact legislation” that addresses these risks. There are legislative bills pending in Congress and the US House of Representatives but which have stalled in committees.
The panel admitted that, early in digital assets history, there were cases of nefarious action by a few. However, the industry has new, self-imposed security to avoid repetition.
“There (were) irresponsible actors in the digital-asset industry and those actors’ attracted headlines,” said Bankman-Fried, adding the industry is now “completely transparent.”
He added the government should make sure digital assets have the reserves they say they have and should be audited regularly. “That’s the most important thing that the US government can do. If a company says it has a billion in reserves, but only has a million, then there is a problem.”
The executives are asking the federal government is to treat cryptocurrency similar to other assets and have a primary regulator which can do regular audits.
Coinbase’s CEO Alesia Haas said the sector is placing emphasis on technology as a means to ensure investors’ safety, adding the industry has 24/7 compliance monitoring, cyber security experts on staff and works closely with law enforcement when ransomware attacks occur.
Haas’s security measures assurance didn’t placate committee chair Maxine Waters (D-California), who pointed out that Americans are increasingly making financial decisions using digital assets daily.
“Some pension funds are beginning to invest in cryptocurrencies on behalf of retirees, despite the track record of volatility of cryptocurrencies as investments. The pandemic has also contributed to working families looking for alternatives to rebuild their nest egg by investing in cryptocurrency,” she said.
Denelle Dixon, chief executive of the blockchain payments network Stellar, said stablecoins are already being used beyond trading and speculation. “It’s incumbent upon industry to get folks comfortable with the technology,” she said.
Helping the unbanked
Crypto proponents often argue that blockchain technology allows people to bypass traditional intermediaries and move value around the internet without gatekeepers like banks. That could help bring the 1.7 billion people globally who are excluded from the existing financial system into a new one, they say. The panel said digital assets do not have fees, such as overdrafts or money transfers.
“Big banks make a lot of money on those fees,” said Brian Brooks, CEO of Bitfury.
However, Democratic representatives displayed contracts for digital asset services, where service fees are charged, upward of 2-3%. Panel members countered that, saying their fees are “much lower” than financial institutions.
Democratic committee members asked why contracts are only written in English. The panel said most digital assets users are English speaking, but an industry-sponsored survey found 18% of African Americans, 17% of Latinos, 21% of Asians and 43% of white have used digital assets.
“We have a diverse client base,” said Brooks, who was interim head of Comptroller of the Currency under former president Donald Trump.
A talking point for proponents of digital assets is that heavy regulations will, and have, sent the technology and jobs overseas. That point was driven home by Republicans and the CEOs during the hearing.
Brooks said over regulation would send US tech talent to depart for jobs in foreign countries.
“A surprising number of talented traders have left for Portugal, Dubai, Abu Dhabi, Singapore and other jurisdictions that are not at all unregulated but have growth,” he said.
Part of the innovation created by digital assets is known as Web 3.0, a new paradigm in web interaction believed to mark a fundamental change in how developers create websites, but more importantly, how people interact with those websites.
Bankman-Fried and Brooks said the next generation of the internet is being spearheaded by blockchain technology.
However, Bankman-Fried, a MIT graduate in physics, said the US can reverse the exodus. “I am optimistic the trend will turn around in the next few years” with smart, sensible industry regulations.
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