For a technology with ambitions to accelerate the workings of financial infrastructure in the United States, cryptocurrencies have made extremely slow progress on making the case for custom legislation before lawmakers. On Dec. 8, 2021, representatives of the crypto industry tried again.
While urging Congress to establish a "single unified framework" for regulation, representatives of the cryptocurrency industry also asked the legislative body to formulate laws that were separate from the existing framework to ensure that innovation thrives in the crypto ecosystem. According to online publication Coindesk, nearly 40 lawmakers asked questions relating to various aspects of cryptocurrencies.
- During their appearance before Congress, representatives of the cryptocurrency industry asked for a single framework headed by a federal regulator to oversee crypto.
- Questions from Congressional representatives reflected a change in their stance from skepticism to curiosity about crypto's potential to reinvent the country's financial infrastructure.
- The wide range of questions asked by Congressional representatives were testimony to the effect that cryptocurrencies might have on the financial ecosystem.
Another Attempt to Understand Cryptocurrencies
The hearing yesterday was another attempt by regulators to understand an asset class that has exploded in popularity during the pandemic shutdown.
Crypto, once an object of derision and a backwater of the financial ecosystem, has grown in stature and relevance since March 2020. Retail investors, flush with stimulus money and leisure time, poured money into the asset class, while institutional investors hungry for returns in a low interest rate environment rushed to take advantage of its volatility. Both have helped push the overall market capitalization for crypto markets past the $2 trillion mark from the roughly $225 billion in the days just before government shutdowns.
The views of Congressional representatives about the asset class have also morphed from a deeply skeptical take on it to a more nuanced one in which the legislative body recognizes the industry's potential to upend the financial ecosystem. "I am tremendously impressed. I see a lot of ingenuity, a lot of entrepreneurial spirit," Rep. Pete Sessions (R-Texas) told the witnesses at yesterday’s hearing.
Questions from regulators at the hearing focused on the utility of cryptocurrencies within the existing financial framework. Some, like Rep. Gregory Meeks (D-NY), wanted updates on the potential of cryptocurrencies to act as a tool for financial inclusion through minority depository institutions. Meanwhile, Rep. Alexandra Ocasio-Cortez (D-N.Y) was curious about the role that stablecoins played in the crypto ecosystem.
Others were more concerned about their impact on the primacy of the U.S. dollar as reserve currency and on the Federal Reserve's economic policy. In response to a question from Rep. Blaine Luetkemeyer (R-MO), Brian Brooks, chief executive officer at bitcoin mining company Bitfury, pointed to the overall decline in the influence of other world currencies and said that an "internet-enabled" U.S. dollar will enable the currency to compete with others based on features and utility. He also said the availability of a competing digital currency would keep the Fed's monetary policy with regard to the U.S. dollar in check.
Stablecoins, perhaps the fastest growing type of cryptocurrencies, were also a prominent subject of discussion at the hearing yesterday. The Treasury-led President's Working Group (PWG) recently released a report about stablecoins that called for regulating companies that issue such coins in a manner akin to that of depository institutions. Jeremy Allaire, CEO of stablecoin issuer Circle, told representatives that he did not agree with all of the report’s findings. "I support a number of things, but not uniformly. I think there are a number of challenges in the report," he said, asking for more clarity about the form a federal charter for stablecoin-issuing institution will take.
Many legislators wanted to know more about the design of regulatory guardrails around the cryptocurrency ecosystem. U.S. regulatory agencies have repeatedly applied the brakes on the ascent of cryptocurrencies in the country even as their counterparts in Europe and Asia are welcoming the asset class, albeit cautiously, into their financial ecosystem. "What Rubicon have they crossed (in their understanding of crypto)?” asked Rep. Bill Huizenga (R-MI).
Brooks of Bitfury said that these countries had understood that crypto was a risk-on asset, meaning that it is meant for investors who can tolerate risk. "We are the last country standing that hasn't figured that out," he said.
This "risk-on" characteristic of cryptocurrencies is reflected in their price volatility and has become a matter of concern for U.S. regulators. In previous appearances before lawmakers, SEC chief Gary Gensler has said that crypto markets are like the Wild West and asked to bring cryptocurrency exchanges, which account for the bulk of spot trading and set prices for crypto derivatives, under his supervision.
At yesterday's hearing, representatives of the cryptocurrency industry called for a "single, unified framework" to govern the asset class. Cryptocurrency products and services are currently regulated by different agencies. As a result, crypto entrepreneurs have to jump through multiple hoops to bring their products to the market. For example, cryptocurrency exchanges have to register as money transmitters in states to provide their services.
Sam Bankman-Fried, CEO of FTX—one of the world's biggest crypto trading exchanges by volume— said that such a framework should include roles for existing agencies like the Commodities and Futures Trading Commission (CFTC) and the Securities and Exchange Commission (SEC).
"Congress should recognize cryptocurrencies under a new regulatory framework," said Alesia Haas, chief financial officer at Coinbase. According to Haas, a federal regulator should be in charge of intermediaries, such as exchanges, within the crypto ecosystem.