On Wednesday, Congress addressed why and how digital assets and cryptocurrencies are impacting the U.S. in today’s digital age. So, why is the House Agriculture Committee and the U.S. Commodity Futures Trading Commission (“CFTC”) speaking to cryptocurrency and distributed ledger technology (DLT) in the digital age?
After watching the hearing in full, I was able to parse through the various talking points.
Congress Has A Vested Interest In Securities and Economic Growth
From the very beginning, House Agriculture Committee Chairman, Michael Conaway, made it very clear why they were there. “[We] have a vested interest in shaping and constructing the definition of a security, because it directly impacts the definition of a commodity.”
Conaway’s opening statement proved powerful and open-minded as to the future of this technology:
” Digital assets like Bitcoin and Ether, but also like hundreds of other token-based projects that are being developed, represent a new way for people to interact and engage in commerce with one another. While digital assets are often thought of as ‘payment systems’ or ‘digital gold’, I believe the promise that token networks hold is more universal – and more exciting – than that. […] Properly regulated markets promote innovation and foster economic growth, and I don’t believe that will be any different with digital assets. Of course, ‘proper regulation’ does not mean ‘intrusive regulation.’ It means, regulation appropriate to the nature of the activities and the participants, and in some cases, it might even mean no regulation at all.” -Chairman Conaway, House Committee on Agriculture, Opening Statement
The Chairman and Ranking Member, Collin C. Peterson,collectively, identified four main goals:
#1 -Promoting a Safe, Efficient, and Transparent Tokens Market
- “When it comes to fostering economic growth, I don’t believe there will be any difference with respect to digital assets.”
- “One cryptocurrency trait we need to turn our attention to is its volatility. Some argue that fluctuations in the value are a good thing, and that it’s part of its appeal. Others may argue, that the increase in speculation causes regular investors to lose a great deal of money.”
#2 -Proper Regulation, Doesn’t Always Mean Intrusive Regulation
- “The focus shifts to the kind of regulation that is appropriate based off the nature of the activities and the participants involved. In some cases, there may not be any regulation at all.”
- “Digital assets, regardless of form, provide for a new way for consumers and businesses to interact and exchange with one another throughout the stream of commerce.”
- “In a new era, we have assets that exist, but can now also be created, exchanged, and consumed-all in a digital form. The promise of being able to secure property rights in a digital space can have a fundamental effect on how individuals interact with one another. We just have to be willing to give it the space to grow.”
#3 -Asking the Right Questions
- “First, how do we tell if a token is a security? This is the biggest question, as whether a token is a security or commodity, depends on its function and phase.”
- “Second, are our current laws appropriate to apply? The problem in answering this is that the traditional standard in which we apply our laws is challenging. If a token is a security or a commodity, or something else, a regulatory regime may not be static. Congress may want to consider developing an entirely new framework that [considers] the diverse characteristics and unique economic relationships embedded into these various types of digital assets.”
#4 -Ensuring Enough Oversight to Help the Space Grow Responsibly
- “It’s important to recognize that it is Congress’ job to be the adults in the room, and ensure that in the early days of this space, there’s enough oversight to help the cryptocurrency space grow responsibly.”
Understanding Why Blockchain Technology Is Valuable
The second witness, Joshua Fairfield, Law Professor at Washington and Lee University School of Law, emphasized that in order to better understand blockchain technology, it’s important to observe the many communities that have formed so we are able to see its potential.
” The potential value with blockchain technology is considerable ,” said Fairfield. He identified seven examples:
- Collaborative communities of artists;
- New forms of corporations;
- Fast and low-cost check settlement;
- Digitization of securities;
- Open and low cost electronic mortgage and secure transactions filing systems;
- Secure international remittances; and
- Voting systems
Ending his opening statement, Fairfield emphasized that individuals need and want an expansion of their online personal property rights. The problem, he believes, is that people just don’t own that much personal property online. “Consider that people used to have record collections-now they have a subscription to Spotify. People used to have bookshelves-now they have Kindle accounts.”
The rationale behind this can be attributed to the behaviors in the early days of the internet. Most notably, intellectual property (IP) owners were concerned about illegal copying and distribution. “It took several decades to develop a technology like the Blockchain,” Fairfield explained, “which can be traded, held, bought and sold -but not duplicated.”
- “Should tokens be deemed proper under the Howie 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.”
- “Using common sense construction of how these communities use the technology, better known as the ‘duck test’, helps regulators sort out whether to engage and if so, where.”
Fairfield concluded his proposal by questioning whether the Howie Test should be the go to standard. He believes that we should be looking to how communities are using the technology, and then turn to how it should be regulated.
Balancing Value With Consumer Protection
The third witness, Amber Baldet, CEO and Co-Founder of Clovyr, emphasized the importance in balancing the value of blockchain technology with consumer protection and national security.
#1 -Take A Cautious Approach to Thoughtful, Innovative Technologies
When it comes to achieving this balance, Baldet believes that it is vital to respect individuals constitutionally protected rights . She described the internet as both a critical infrastructure and a publicly shared good, which makes it that much more significant to look at technologies that might disrupt the space.
#2 -What’s the Next Killer App?
According to the Clovyr CEO, money is currently the killer mobile application for the Blockchain. The question is why?
Peer-To-Peer (P2P) Payments
Similar to email, which has served the cornerstone for how we communicate online, P2P payments will continue to expand into our professional and personal daily lives. Examples of these systems include, but are not limited to PayPal, Venmo, Cash App, and now blockchain technology.
Digital Bearer Assets
We are moving away from traditional bearer instruments, which provides the owner of the document(s) with the right of ownership and title to the underlying property, and towards unique digital bearer assets. This technology can be applied to various industries like mortgages, securities, collectibles, IP rights, personal data and many more. “It’s all about the ability to spend, trade, rent, or license other sorts of unique digital bearer assets,” Baldet emphasized.
#3 -Look to Other Countries
While both the U.S. government and marketplace is struggling to understand how to apply these technological frameworks, other areas of the world are beginning to embrace its ambiguity and are learning by doing. Countries like Malta, Switzerland, and China are beginning to create their own communities, taking the world by storm.
#4-Understanding Who Controls Network Access
With blockchain technology, it’s all about transparency and the DLT being open to the public. When asked by Chairman Conaway what she meant by “open”, Baldet emphasized the importance of the public being able to see as much as possible.
#5 -Blockchain Technology is Not the Answer to Every Problem
The biggest takeaway Baldet had was to enforce the idea that the Blockchain is not the end all solution. 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.”
Baldet referenced countries like Venezuela, Russia, and China, which have made recent headlines. Baldet’s full testimony can be read here.
Why Venture Capitalists Can Benefit
Next up was Scott Kupor, the Managing Partner at Andreessen Horowitz Capital Management. He started off by explaining that venture capitalists are interested in “crypto networks” as it relates to the crypo ecosystem. “Crypto networks offer a new way to build digital services like any internet application that may exist today , such as ridesharing applications and social media applications,” said Kupor.
#1 -Look to Historical Precedent
According to Kupor, the success of community based networks can be traced back to two major movements-open source and open protocols.
The open source software movement started back in 1983 and was considered to be somewhat of a radical notion at the time. Why? A community of developers would publish their software and offer it up freely for others to modify and incorporate into their own projects. “This led to copyright initiatives,” explained Kupor. Today, open source development is the primary means in which software is created, specifically for systems like Linux and Android. This type of development is extremely relevant when thinking about the potential for crypto networks.
In contrast, open protocols have become the structural foundation of the internet we know and use today. “For example, SMTP, is used for our email transmission,” provided Kupor. “These protocols are governed in many cases, by open communities, networks, academics, and government funding.” The idea behind this is that the protocol wouldn’t change and would provide for a more seamless and accessible system.
#2 -Avoiding Platform Risk
According to Kupor, many startups fail because they rely on “platform risk”, where they are attempting to build off other platforms that are governed by central corporations. The problem starts when they find out the rules of the road change over time, handicapping efforts. “As a result, many developers are hesitant to take on this risk and adopt crypto networks, creating new digital services without that risk,” explained Kupor.
#3 -Tokens Are the Glue Binding Community Members Together
Tokens didn’t exist in prior generations, allowing for a direct financial incentive for community members to develop and govern their networks appropriately. “It’s the glue that binds the members in the community and provides incentives for all market participants,” said Kupor. “Understandably so, it creates a whole new set of challenges for regulators, consistent with recent statements from the SEC.”
Kupor ended by proposing a framework that requires risk taking, but at the same time, provides for clarity and certainty to market participants, ultimately resulting in market integrity.
Educate, Rather Than Dismiss The Technology Entirely
Daniel Gorfine, the Chief Innovation and Director of the CFTC, emphasized the need for us to continue studying, learning, and keeping pace with change.
“Given the potential to tokenize a broad range of economic assets, it is important to remind the public that digital assets can also be commodities or derivatives, depending on their term and how they are structured,” explained Gorfine. “Given its potential and its challenges, [our] Chairman has made clear that the proper response by regulators is not to dismiss the entire movement as misguided and foolish, but rather to take the time to learn and facilitate the promise , and guard against risks and bad actors.”
The Power to Transform the Financial Sector
The former CFTC chair, Gary Gensler, stated that the Blockchain has a real potential to transform the world of finance for five reasons:
- Lowers costs and risks in the financial sector
- By bringing it into this world of public policy frameworks, minimizes chances for illicit activities, ensures financial stability, and protects the investors and consumers
- The SEC and CFTC have a role to play, as evidenced by their notices and enforcement actions
- The ICO market is ripe with scams and frauds, and bad actors have found out how to use this new currency, including state actors-e.g. recent news of the indictment of twelve alleged Russian officials and talks of Venezuela attempting to raise money off their oil and outrunning the U.S. sanctions policy
- Gaps exist in our laws because –
- Crypto exchanges are attempting to act as state money transmitters, such as Western Union and Money Gram. This cannot work because of the complexity and traceability issues;
- There’s a lack of brokered access, where brokers are not sending 1099-B’s to individuals;
- Issuers of securities in the space are only slowly coming into the SEC sphere;
- The unregulated underlying crypto cash market is a mess and the CFTC isn’t abe to predict the next patterns.
Gensler ended his statement by proposing a question on whether the CFTC or some other agency should be given additional authority to regulate this underlying cash crypto market, believing the CFTC to be best suited for the task.
Overall, Congress’ response to the various proposals was warm. Let’s hope they take this in stride. You can watch the full hearing here.
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